The board of EDF, the French State controlled owner of UK and French power stations and vendor of the new Gen 3 EPR (European Pressurised Water Reactor) voted narrowly to approve the Hinkley C reactor project on Thursday (by 10 votes to 7). Contracts were supposed to be signed today (Friday). But then in an unexpected move the UK Government has called the project in for re-evaluation. Clearly, they did not expect the French to proceed. What on Earth is going on? [image credit The Guardian.]
I cannot provide a simple answer and I normally avoid writing about things I don’t properly understand. The Hinkley C deal has always struck me as a dogs dinner. And so it is perhaps wise that the UK should question staking 7% of its future electricity supply on such a mess.
What makes Hinkley C such a mess and how did we get to this point?
- Hinkley C is to be built by French nuclear giant EDF that is 85% owned by the French state.
- EDF will be majority owner of the plant that has a projected £18 billion construction cost.
- Chinese state-owned CGN is to take a £6 billion stake in the project.
- The gen 3 EPRs are the reactors to be provided by supplier Areva that has recently become a subsidiary of EDF. Areva is reported to be in financial difficulty owing to large time and cost over-runs at Olkiluoto in Finland and Flamanville in France where two EPRs of same design are under construction, over time and over budget.
- Two, not one, power stations are to be built that will include 2 reactors delivering a total of 3.2 GWe (electrical) power.
- The massive investment will be underwritten by a contract guaranteeing the price paid for electricity decades into the future. This is one of the most controversial elements of the project. An inflation indexed price of £92.50 / MWh (2012 prices) is guaranteed for 35 years after grid connection. This compares with wholesale prices that are currently of the order £50 / MWh.
So what is there not to like about this? Before answering that it is worth while pondering the benefits. Much of the £18 billion investment will actually be spent in Britain, not just pouring concrete on site, but I’m sure a large number of UK companies will be engaged in providing high-end engineering services too. And second, we must not lose site of the fact that Hinkley C is projected to provide 7% of UK electricity for 60 years. This power station combined with other new-build nuclear is to play a key role in keeping UK lights on.
But on the downside we need to ask why the UK should rely on investment from the French and Chinese States for a vital flagship infrastructure project? Should this not be funded by the British State? The simple answer is that the British State is bankrupt (as is the French). And EDF already owns and operates all of our existing nuclear power stations. And by all accounts have done a very good job since taking over. It may equally be argued that the British State has done a Sterling job in persuading these foreign countries to invest in our future. On balance, I don’t think we can complain about foreign involvement.
The real problem lies in the projected cost and price guarantee. The media still speculate that the £18 billion budget may be overrun as has happened at Olkiluoto and Flamanville, which could happen, but this betrays a lack of understanding of these projects.
The original build cost estimate at Olkiluoto was €3 billion for a 5 year build period and this has escalated to €8.5 billion and a 13 year build period. The cost overruns are directly linked to the delays and time overrun. Olkiluoto is a single power station and so building two on this dismal track record would cost €17 billion which takes us towards the Hinkley estimate.
At Flamanville the original budget was €3.3 billion for a 5.5 year build that has escalated to €10.5 billion over 11 years giving a price tag for Hinkley C of €21 billion. Again we see where the £18 billion number comes from.
Hinkley C has a projected build period of 8 years and Chinese involvement is intended to ensure that time and cost overruns experienced in Finland and France do not occur in the UK. We must surely have some faith in UK engineering and our ability to complete this on time. But an 8 year build should carry a price tag substantially lower than £18 billion. The last nuclear power station to be build in the UK was Sizewell B that came on line in 1995 and was built in 7 years. The mean build time for the global nuclear fleet is 7.5 years. The £20 billion price tag assumes that the Brits, the French and the Chinese are going to botch Hinkley in the same way as Olkiluoto and Flammanville. While it is probably far to late in the day to do so, Greg Clerk, new Secretary of State for Business, Energy and Industrial Strategy, ought to look at this £18 billion price tag and ask where it comes from.
The other side of the coin is the projected income. The £92 / MWh index linked guaranteed price is viewed by many as far too high. Indeed, this only harms the reputation of nuclear power that was supposed to be too cheap to meter, not twice as expensive as alternatives. Over 35 years the projected income at 2012 prices is of the order £72 billion* which even taking into account finance and operating costs seems a vast amount compared to the investment that may well come in well below £18 billion. No wonder the French and Chinese have pursued this opportunity.
The heart of the problem lies in the impossibility of trying to estimate construction costs over the next decade and finance and operating costs over 35 years, taking us 45 years into the future, that is to the year 2061. The UK electricity market is also plagued by opacity and increasingly dominated by a subsidy culture. There must surely be a better way of doing this if commenters wish to volunteer their suggestions.
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