Analyst view: Peter Atherton

“It appears EDF has negotiated a deal that delivers private sector-like returns without it having to take the usual private sector risks.”

A recent report in The Times newspaper stated that the Treasury is looking to charge EDF and its partners a fee of up to £250 million for the government’s £10 billion of construction finance guarantees for the new Hinkley Point C nuclear station. The charge would represent a fee of 2.5 per cent of the potential liability, which looks a little on the low side for such an arrangement. It remains to be seen whether or not the European Commission will view this fee as being comparable to commercial rates or a possible sign of illegal state aid.

However, disclosure of the fee once again focuses on the bizarre way that Hinkley Point is being financed. Back in 2008 EDF promised it could build Hinkley Point C for around £3 billion per reactor and would take all of the construction, power price, and financing risks itself. This morphed over the next five years, to £8 billion per reactor, with the consumer bearing all the power price risk and the government taking the bulk of the financing risk, albeit for a fee.

The explosion in costs has led to a strike price being agreed between EDF and the government of £92.50/MWh when they signed the heads of agreement last year, although it is worth noting that the strike price is in fact already £94.90 because we have already incurred one year’s worth of inflation. Yet despite shifting the power price risk and the financing risk to the consumer, EDF has told shareholders it expects to earn a 10 per cent Project IRR. This suggests EDF expects to earn a 15 per cent equity IRR, with Hinkley C having a £3 billion annual turnover when it is commissioned.

It appears that EDF has negotiated a deal with the government that delivers private sector-like returns without it having to take the usual private sector risks.

The eventual cost to the consumer of new nuclear overwhelmingly depends on two factors: the construction cost and the cost of capital. In Finland the new Fennovoima project has been structured to deliver the lowest construction and cost of capital possible. This has resulted in a strike price of “sub €50/MWh” being set. If the UK had been able to match that on Hinkley, then UK consumers would be saving some £1.5 billion a year.