Decision time

This year, EdF’s newly appointed chief executive, Jean-Bernard Levy, has a very big call to make - whether or not to proceed with the £24.5 billion construction of Hinkley Point C. Nigel Hawkins shows what lies in the balance.

Prior to joining EdF this year, Jean-Bernard Levy was chief executive of Vivendi, which had imploded at the end of the disastrous Jean-Marie Messier reign. For a short period, too, Levy ran the Thales defence business.  

While there may be direct – or at least indirect – involvement from the top echelons of the French Government, Levy ultimately has the final authority on whether EdF should lead a consortium to build Hinkley Point C, the UK’s first third-generation nuclear reactor.

The cost of Hinkley Point C recently climbed to a staggering £24.5 billion – equivalent to two-thirds of EdF’s current market value – for the 3,200 MW twin nuclear plant.

This figure does, though, include estimated inflation during the construction period and the very considerable interest bill that will be run up prior to commissioning, which will not be before 2023.

For the UK, Levy’s decision is crucial. After all, the UK has not built a nuclear plant since Sizewell B was eventually commissioned in 1995 after years of battling in the planning courts.

No wonder that DECC Secretary of State, Ed Davey, was eulogistic in his support for Hinkley Point C – “And let’s not forget what a fantastic boost this investment is for investment, growth and jobs”.

And in staccato style, Davey went on to purr that “this is good news for the economy. Good news for consumers. Good news for energy security. Good news for the environment. Good news for jobs”.

Importantly, Hinkley Point C is intended to be the first of several new third-generation plants to be built.

Indeed, the Government announced recently that the NuGen consortium, comprising Toshiba and GdF Suez, was making progressing in developing its funding proposals for its Moorside nuclear new-build project in Cumbria.    

Among the most prominent backers of new nuclear-build are large energy users.

CBI boss, John Cridland, was particularly enthusiastic in stating that “Hinkley should set the ball rolling for the UK’s new nuclear-build programme, putting us on the right path to achieving a secure and sustainable energy mix”.  

For EdF, the stakes are very high. After all, the current French Government’s policy of reducing the nuclear share of generated output from over 70 per cent to around 50 per cent – mainly in favour of renewables – is challenging enough.

EdF also has a very sizeable investment bill in France as it replaces some of its existing plant. The third-generation 1,650 MW Flamanville plant is now due to be commissioned in 2017 – and other such plants may follow.

Hinkley Point C’s £24.5 billion cost, which will presumably be shared – off-balance sheet – between the consortium members, is a vast amount for a single plant. Inevitably, it will impact the financeability of other nuclear plant projects in France.

Central to the finances of Hinkley Point C is the Government’s award of an inflation-linked £92.50p per MWh Contract for Difference (CfD), which effectively underpins the revenue line and protects EdF from any sustained price weakness.

Most importantly, perhaps, is the unprecedented 35-year duration period of the CfD.

In effect, the Government is providing a massive long-term financial commitment in a market where prices can change quickly. After all, in the parallel oil market, the Brent Crude price has recently fallen by up to 40% in a matter of months.  

Some guidance has also been given by Drax Power, whose 2015 contracts average just under £53 per MWh – a long way short of the £92.50 earmarked for future Hinkley Point C output. 

Against this background, it is hardly surprising that City investment analyst, Peter Atherton, declared himself “flabbergasted” by the generosity of the terms being dangled before EdF to deliver Hinkley Point C.

And shadow energy spokesman, Tom Greatrex MP, has also been critical and has suggested that the terms of the CfD should be examined by the National Audit Office.   

Yet, however generous the proposition, it does not mean that EdF will necessarily proceed.

While Hinkley Point C would be financed off-balance sheet, the fact remains that EdF’s current net debt is high – at €30.6 billion. And, though it is true that its share price has rallied slightly of late, its five-year performance has been dire – EdF’s shares are down by c40 per cent over the period.

In recent years, there have been various putative partners for EdF’s Hinkley Point C project, either from China or from sovereign wealth funds in the Middle East, including Saudi Arabia.

To date, though, while potential backers of Hinkley Point C will need to study – with forensic care – the CfD, there is no guarantee that the requisite funds will be forthcoming.

One particular long-touted partner, Areva, is facing major challenges. France’s leading nuclear engineering business, in which the French Government has an 87 per cent stake, has recently given another sizeable profit warning.

Moreover, there is a real fear that a substantial capital injection will be needed – hardly an ideal scenario prior to embarking on a major long-term investment commitment.

Indeed, a nervous Treasury is now apparently conducting a secret review of the Hinkley Point C project, including the CfD.

Whilst it would, no doubt, vigorously deny any plans to back-pedal, its enthusiasm may have waned, especially if Areva – involved directly in both the massive over-runs at both Olkiluoto in Finland and Flamanville – becomes an even weaker link.    

Atherton put it very succinctly – “The UK Government has commissioned the most expensive power station in history and the only company that can provide the equipment is in trouble. That is a big problem for Hinkley”.

Any investor will have to accept that, irrespective of the unbounded generosity of the 35-year CfD, Hinkley Point C carries heavy risks, especially during the lengthy period of construction.

Aside from political risks – an incoming Labour Government seems likely to adopt a different energy policy – there are the obvious general risks that periodically afflict the nuclear industry.

The disastrous 1986 explosion at Chernobyl in modern-day Ukraine had a massive impact in terms of nuclear investment.

Similar comments could apply equally to the more recent nuclear accident at Fukushima in Japan following the record-breaking earthquake in the region.

Neither can a deadly terrorist attack on an existing nuclear facility be discounted.

Any of these scenarios could stop new nuclear-build in its tracks.

More specifically, the two most recent EU nuclear new-build projects have both given rise to major price over-runs and time delays.

In Finland, the third-generation Olkiluoto nuclear project is over nine years behind schedule; it is now due to be commissioned in 2018.  In terms of cost, the Olkiluoto bill seems to have soared from c€3.0 billion to a projected completion bill of c€8.5billion.

EdF’s own Flamanville project has also been beset with delays and cost increases. The commissioning date is now 2017, compared with the original 2012 aspiration. On the cost side, the latest projection is c€8.5 billion for a plant whose original costs were c€3.3 billion.  

Potential investors are bound to ask who will pick up the bill if any of these – or indeed – other scenarios actually come to pass.

However, if Levy decides not to authorise the Hinkley Point C project, it will be time for the UK Government to dust down Plan B – if there is one.

Presumably, under Plan B, the Government could seek to finance the construction of Hinkley Point C and proceed on the same basis as it did with HS1, the first high-speed rail project. 

And it may be possible to persuade EdF to manage the project even if the Government actually financed it.

The Government’s Plan C would presumably be to emulate Germany, Italy Spain, Sweden and Switzerland and concede that new nuclear-build is quite simply a non-starter.   

The current commissioning date for Hinkley Point C is late 2023 – way behind the cherished hopes of EdF Energy’s UK Chief Executive, Vincent de Rivaz, of a Christmas 2016 start-up.

But it will be his French boss, Jean-Bernard Levy, who will have to make the ultimate big call for EdF – to Hinkley or not to Hinkley.