Hinkley Point C: is the UK building a white elephant?

Good things are worth waiting for. But not everyone is convinced that EDF’s Hinkley deal is a good one. Or even if the 3.2GW power plant is fit for purpose in a new world order for energy. Jillian Ambrose investigates.

It was in 2008 that the UK first launched a consultation on the Hinkley Point C new nuclear plans. Since then the French energy firm has sunk millions of pounds and the better part of a decade into protracted negotiations with the government, the European Commission, and a variety of possible investment partners before inking a deal with Chinese state nuclear company CGN on 21 October.

But in that same time the energy market has changed, political priorities have shifted and concerns are growing that the UK may be about to saddle energy consumers with an expensive relic with little relevance in the radical new energy landscape which has begun to emerge.

“What is the service that nuclear offers?” asked Bloomberg New Energy Finance EMEA head Seb Henbest at a recent energy conference.

“What you need is not bulk supply that is on forever but flexible supply which can balance the variable and very cheap supply that renewables can supply in the future. Nuclear fails for me in terms of what it offers to the system,” he said.

In recent months UK energy behemoths National Grid and Centrica have both backed a changing tide in the energy market. The new direction is away from large, expensive energy generation assets towards a distributed, user-centric model which offers flexibility and low capital costs.

Centrica backed out of its 20 per cent option in the Hinkley project in February 2013. And this year announced a £1.5 billion strategy shift away from centralised asset investment towards distributed generation. Meanwhile National Grid plans to use demand-side response for the majority of its balancing by the end of the next decade. For both companies, the new route offers a cheaper, easier way to meet the UK’s power demand.

These plans stand in stark contrast to the complex financial arrangements and extended construction times needed for Hinkley. When the first reactor finally begins to generate power in 2025 at the earliest the UK may have solved the problem of secure reliable baseload without the need to pay out the £92.50/MWh to be earned by Hinkley for a controversial form of power.

Even those who back the use of nuclear generation are not willing to support the Hinkley plans.

Labour shadow climate change minister Barry Gardiner at a recent London conference took pains to voice his support for UK nuclear development, saying it will provide reliable, low-carbon baseload power while driving investment in UK plc. But he stops short of supporting EDF’s plans, saying “the cost of the Hinkley deal has been far too high” and raises “another question mark over Government competence”.

And Gardiner is far from the only one railing against the costs associated with the project.

Jefferies’ utilities analyst Peter Atherton has been outspoken in his condemnation of the project branding Hinkley “the most expensive power plant in the world”.

“For the cost of £16 billion for the 3,200MW to be built at Hinkley, the UK could build 27,000MW of new gas-fired power stations, solving the ‘energy crunch’ for a generation. Perhaps the extraordinary feature of the deal is the 35-year inflation indexing of the strike price. By granting full indexing of the revenue, EDF are handed the opportunity to earn extraordinary returns as the project matures.”

The so-called ‘strike price’ will pay EDF a guaranteed revenue. But this will be calculated against the prevailing wholesale market price which at the time the contract was agreed was significantly higher than the historic lows seen in the market now, meaning inflated returns for the same technology through the top-up payment. Although future power prices are difficult to predict many analysts believe that lower prices are likely as subsidised renewable energy plays a greater role in the market, driving prices lower and Hinkley earnings higher.

And higher consumer costs for Hinkley could be just the start. The agreement with China is set to reignite the UK’s floundering new nuclear ambitions and paving the way for the Chinese nuclear firm to develop a second new nuclear plant at Sizewell and a nuclear plant of their own design in Essex in which it will take a two thirds stake.

HSBC notably hit out at the plans saying it sees “ample reason” for the project to be scrapped. The bank set out eight concerns with the project including the UK’s declining demand for power; a three-fold jump in the UK’s interconnection capacity with continental Europe by 2022 and “a litany of setbacks” in Finland, France and China for the same EPR nuclear model planned for Hinkley Point.

The possibility of a delay is high. And EDF’s contract with the government stipulating a 2033 start date hardly offers confidence that the 2025 start date will be met. It is in EDF’s best interests to complete the task and produce power as soon as possible, but equally it’s in the best interest of the government to plug the growing gap in the UK’s generation capacity.

Or perhaps by 2025 the task of balancing the system mightn’t be as formidable as it seems for the coming months.

“From a consumer’s point of view, the solar on the rooftop is going to be the baseload,” National Grid boss Steve Holliday said in a recent interview. And peakload will be managed by shifting demand and ramping up centralised generation which is flexible.

In a decade’s time Hinkley might well find itself an ornamental reminder of the costly mistakes of the past.