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Saturday, 24 February

What's the Point? Hinkley a No Value Deal Says NAO

The Department for Business, Energy and Industrial Strategy’s deal for Hinkley Point C has locked consumers into a risky and expensive project with uncertain strategic and economic benefits, according to today’s report from the National Audit Office (NAO).

When the Department finalised the deal in 2016, its value for money tests showed the economic case for Hinkley Point C was marginal and subject to significant uncertainty.

Less favourable but reasonable, assumptions about future fossil fuel prices, renewables costs and follow on nuclear projects now mean the deal is absolutely not value for money according to the Department’s own tests.

Friday June 23's report finds that the Department has not sufficiently considered the costs and risks of its deal for consumers. It only considered the impact on bills up to 2030, which does not take account of the fact that consumers are locked into paying for Hinkley Point C long afterwards. It also did not conclude whether the forecast top-up payments are affordable.

 

Top-ups topped- up

The government’s case for the project has weakened since it agreed key commercial terms on the deal in 2013. Delays have pushed back the nuclear power plant’s construction, and the expected cost of top-up payments under the Hinkley Point C’s contract for difference has increased from £6 billion to £30 billion. But the Department’s capacity to take alternative approaches to the deal were limited after it had agreed terms. 'The government has increasingly emphasised Hinkley Point C’s unquantified strategic benefits but it has little control over these and no plan yet in place to realise them', says the  NAO.

The report finds that the Department aligned its approach to the Hinkley Point C deal with its support for other low-carbon technologies. This means the private sector bears the risk that construction costs overrun. The NAO’s analysis suggests alternative approaches could have reduced the total project cost. The Department did not assess whether this would have resulted in better value for money for electricity consumers.

 

More money demands

There remains the risk that NNB Generation Company Limited (NNBG) will seek further financial support from the government, notwithstanding the contractual terms of the deal.

 

Reactor

The NAO is also aware, like many others, that the reactor design for HPC is unproven and other projects that incorporate it are experiencing difficulties. Furthermore, EDF’s financial position has weakened since 2013.

It will not be known for decades whether Hinkley Point C will be value for money. This will depend on whether the current contractual arrangements endure, along with external factors – in particular, future fossil fuel prices, the costs of alternative low-carbon generation and developments in energy technology and the wider electricity system. The Department has, however, negotiated a deal that means some terms can be adjusted in consumers’ favour in future.

“The Department has committed electricity consumers and taxpayers to a high cost and risky deal in a changing energy marketplace. Time will tell whether the deal represents value for money but we cannot say the Department has maximised the chances that it will be,”

said Amyas Morse, head of the National Audit Office.

 

Stats

£18 billion - Estimated cost to construct Hinkley Point C (in 2016 prices).

7% - Proportion of Great Britain’s estimated electricity requirement met by output from Hinkley Point C in the mid-2020s.

£92.50 - Price (in 2012 prices) to be paid to NNB Generation Company (HPC) Limited (Hinkley Point C's operator) per megawatt hour of electricity generated for the first 35 years.

£30 billion - Estimated present value in March 2016 of future top-up payments under the Hinkley Point C contract for difference (2015-16 prices discounted to 2015).

9% - The expected return to Hinkley Point C’s investors net of the impact of taxation (norminal post-tax equity return on the project).

£10-15 - Department for Business, Energy & Industrial Strategy’s estimate of the amount from the average annual household electricity bill that will go towards supporting Hinkley Point C up to 2030.

£21-£24 - The Department’s estimate of the average increase on annual electricity bills up to 2030 if Hinkley Point C is delayed by three years and replaced by low-carbon alternatives.

£7.3 billion - NNB Generation Company (HPC) Limited’s (NNBG’s) estimate of the costs of decommissioning Hinkley Point C and managing its waste (in 2016 prices).

£79.7 billion - NNBG’s estimate of the net project cash flows by the end of Hinkley Point C’s operational life in 2085 (in 2016 prices).

 

Ownership

The Department for Business, Energy & Industrial Strategy announced on 29 September 2016 that it reached a deal to support construction of the Hinkley Point C nuclear power station. It will be the first nuclear power station built in the UK since 1995 and the Department expects that it will generate around 7% of Great Britain’s expected electricity requirement from the mid 2020s.

Nuclear New Build Generation Company Limited (NNBG) will build and operate Hinkley Point C. NNBG is owned 66.5% by Electricite de France (EDF) and 33.5% by China General Nuclear Power Group (CGN).

Picture: Should the sun set on the Hinkley Point C project? A nuclear power station for illustration purposes only

Article written by Brian Shillibeer

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