Hinkley Point C: a good deal at £92.50/MWh?

As the long awaited strike price for new nuclear was announced on Monday, the big question for government and EDF bosses was: Is it good value?

It is one that divides the energy sector. Renewable generators worry nuclear support could divert a big chunk from the budget available to them. Whereas renewable costs are coming down, critics note nuclear costs tend to go in the opposite direction, largely due to increased safety requirements. Meanwhile, the value case for low carbon generation as a whole depends on rising gas and carbon prices, which are by no means guaranteed.

Nuclear power can, however, offer low carbon electricity at a stable price and a scale renewables would be hard pushed to match.

Energy secretary Ed Davey today sat beside EDF bosses and sought to assure the public they were getting a fair deal.

The headline was a “strike price” of £92.50/MWh for 35 years at Hinkley Point C, nearly twice the current wholesale power price. If the wholesale power price is below that figure, customers will make up the difference. If the wholesale price rises higher than that, the generator pays back the excess.

The price is fully inflation-linked for the duration of the contract, despite most of the cost being incurred upfront.

Customers will not pay for the power plant until it starts generating, scheduled for 2023. Davey said it will have a “negligible impact” on bills in 2023 and the Department of Energy and Climate Change (Decc) estimates building 10GW of nuclear will cut the average household bill by £77 in 2030 compared to a scenario with no nuclear power. That is because it reduces dependence on gas, which is expected to become more expensive.

Davey admitted it would be “absurd” to treat that estimate as a guarantee. “You want me to guarantee there will be £75 off bills. I can’t guarantee that, of course I can’t.

“The whole world of energy is full of uncertainties. What is the gas price going to do? How fast will the cost of offshore wind come down? Will CCS be viable this decade? We have to manage those uncertainties.”

He said it would be “risky” to depend on gas and there would not be enough renewable power to fill the capacity gap. “This deal is cost-competitive with onshore wind at the moment and it would be quite a brave person to suggest we could produce the power coming from Hinkley Point C with wind turbines.”

Indeed, Decc claims it would take a 250,000-acre windfarm to produce an equivalent output to Hinkley Point C.

Davey talked up a gainshare arrangement, by which investors must split with customers any significant windfalls from underspending on construction, refinancing or equity sales.

He also pointed out that investors would bear the risk of construction overruns. That is not trivial, given the EPR technology to be used has a poor track record. EPR plants in Finland and France have faced substantial and costly construction delays.

“We are hugely incentivised to deliver in time and under budget,” said De Rivaz.

The strike price may be adjusted, either up or down, to pass through changes to certain costs such as network charges, business rates and taxes.

It covers the full cost of decommissioning and an unspecified share of waste management costs. “With the clean-up costs included at the outset, we will avoid the mistakes of the past, which we are still paying for,” said Davey.

There are also measures to guard against a political U-turn further down the line. Any future government shutting the power station down without a pre-approved reason must compensate investors for their expected equity return.

Vincent de Rivaz, chief executive of EDF Energy, said: “We are convinced that bringing in this market – more stability, more certainty, more visibility, is all helping the bills to avoid going up and up. In the long term, this project and others will bring certainty for investors and stability for customers.”

The deal also included a surprise sweetener for a future deal at Sizewell. If EDF Energy makes a final investment decision on Sizewell C in time, it will give a £3/MWh discount on the Hinkley Point C strike price, on the assumption it can share first-of-a-kind costs between the two stations.

Davey said while negotiations over support for a new plant at Sizewell would “hopefully not be so protracted” as both sides have learned from Hinkley Point, the deals will be different. “There is no way they will be identical and let me just tell my EDF colleagues, we will be looking for a much lower price.”

It was a sign of confidence from EDF in the UK’s plans for a nuclear fleet. De Rivaz said: “We believe that the UK government has a clear ambition to develop a nuclear programme and we want to be part of it… It is important that we show that we believe the cost of the next EPRs after the first will be lower and it will clearly be the case.”