The Hinkley Point C decision shows infrastructure investment will continue

16 September 2016

The Government’s statement in support of EDF’s Final Investment Decision (FID) on Hinkley Point C brings to a close the long period of uncertainty over whether the project would go ahead. This decision has significant implications for the UK in the short, medium and long-term.

Many commentators have argued that the contract for different (CfD) strike price of £92.50/MWh is too high and that the 35 year duration of the contract for difference is too long. There is no getting away from the fact that the strike price is high when compared to current wholesale prices and, as noted in the recent NAO report, the recent fall in wholesale prices makes current estimates of the subsidy level higher. Without a detailed understanding of the costs, risk allocation and contract re-openers during construction and operations, it is difficult to comment on the price.

It’s worth remembering the scale of the project: Hinkley Point C is a 3.2GW plant which, when fully operational, will meet 7% of the UK’s power needs. It will displace 9m tonnes of carbon a year for each year of its 60 year operating life. And EDF has indicated that up to 60% of the construction cost will be placed with UK firms, providing 25,000 jobs on-site during the construction period.

These factors impact the energy trilemma and energy sector policy objectives.

  • EDF’s decision sends a signal that the UK remains an attractive place to invest for foreign-owned companies and that the £18bn cost is financeable.
  • It provides a pipeline of work from FID to commercial operation for nuclear and construction companies, enabling preferred bidders to become contract counterparties, and opening up further opportunities for the supply chain.
  • From an economic perspective, it provides long-term regional support in the south-west; job opportunities for local businesses, improvements in local infrastructure and enhanced skills training opportunities. The construction project will be followed by long-term operations and maintenance activities and potential development of a regional nuclear centre of excellence.
  • The Government’s “golden share” shows its commitment to large-scale infrastructure and support for new nuclear as a clear contributor to the UK’s security of supply.

The energy trilemma looks at affordability as well as security of supply and low-carbon, so how does Hinkley fare under this comparison?

  • An additional 3.2GW from the mid-2020’s for the next 60 years is beneficial to the UK security of supply position; not least because of the closure of most of the existing nuclear fleet in the 2020’s as well as the closure of coal-fired and older gas-fired plant, but also given current uncertainty over future operation and pricing of interconnectors with EU countries. Clarity is however needed on the realistic operational timing of each reactor to support National Grid’s planning.
  • Nuclear is low-carbon and provides baseload power, so supports UK environmental policy 24/7, including when the wind does not blow and the sun does not shine. Other intermittent low carbon technologies require back-up power to provide the same level of security, currently provided by gas-fired plant and thereby increasing carbon emissions. Longer-term, intermittent low-carbon technology linked to large-scale storage facilities could provide a more baseload-like solution but this is not currently cost-effective.
  • The strike price associated with Hinkley Point C is comparable with the strike prices associated with offshore wind farms and solar. The cost of both is reducing, but does not take into account the cost associated with back-up power required, so may not be directly comparable. Combined cycle gas turbines (CCGT’s), the tradition baseload provider now operate more as peaking plant. In fact, given the challenging economics, no new CCGT has reached FID for a number of years, even with the UK Capacity Auction and carbon prices.
  • The strike price incorporates the allocation of risks for cost overruns and delays in such a way that EU State Aid approval was achieved. To provide confidence that technology and construction risks have been appropriately allocated, EDF should make clear how it has incorporated lessons from Flamanville and Olkiluoto into its UK plans.

EDF’s statements on the use of UK-based firms and creation of jobs is clearly beneficial to the economy, rebuilding skills in engineering and embedding these in the supply chain. An additional challenge is whether it provides new impetus for encouraging women into science, technology, engineering and maths (STEM) careers, given the scale and duration of the construction project and the long-term operational needs. PwC’s recent publication “Igniting Change 2” highlighted that the proportion of women on boards in nuclear companies is only 8%. Could Hinkley Point C be a turning point to encourage women in nuclear?

The decision to proceed sends a positive signal to global investors that companies with major infrastructure projects in the UK have the confidence to invest, Government is supportive and the domestic supply chain is ready to assist. It furthers Government’s low carbon objectives and provides a significant contribution to long-term security of supply. It boosts job prospects and encourages enhanced skills training, although the timing of these is yet to be clarified. The other new-build companies, Horizon and NuGeneration, should take encouragement to continue on their journeys to FID, so they too can contribute towards the UK’s low-carbon economy. If they can learn from the experience of EDF, there could be three new nuclear plant operational in the UK in the late 2020’s.

 

Karen Dawson | Director - Strategy
Email | +44 (0)207 8044 591

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