Missing the Point: What a delay to Hinkley Point C means for the power market

Following EDF's announcement that the start of generation Hinkley Point C will again be delayed, this time until at least 2029, Tom Smout, senior associate at Aurora Energy Research, gives a run down of how this will affect the power market in Great Britain, including the impact on prices, costs and emissions.

On 23 January, EDF formally announced that Hinkley Point C, Britain’s next nuclear plant, could be delayed until as late as 2031. Specifically, reactor one is expected sometime between 2029 and 2031. The second reactor no longer has a firm expected operational date. Previously, EDF had commented that the plant’s operations could be delayed until 2028.

As delays go, this is not so urgent that it creates an immediate crisis of supply for the energy sector, but it is soon enough that the market will have to find short-term solutions to the absence of 3.2 GW of nuclear capacity. As lovers of nuclear are fond of pointing out, nuclear capacity contributes to cheap wholesale prices, decarbonisation and security of supply. The corollary of this is that missing or delayed nuclear capacity creates higher prices, additional emissions and a shortfall of firm capacity.

For the rest of this piece, I will assume that the first reactor has been delayed from commissioning in 2028 (Aurora’s previous in-house assumption) to 2030 (the average of the delivery range given by EDF).

Systematic impacts: costs, carbon and dependence:

Hinkley point is a 3.2GW project, and as a nuclear plant it will target baseload operations, 24 hours a day, 365 days a year, with occasional downtime for technical reasons. If make some allowance for availability covering refuelling, technical faults and maintenance, that translates to about 20TWh annually. Assuming one reactor, coming online around halfway through the year, suggests that the plant would have contributed around 6TWh in its first year of operations. Across the period 2028-30, a 2-year delay leads to a shortfall of about 38TWh, about 4% of GB electricity demand in that period.

This demand needs to be met, of course, and within a timeframe of only 5 years, there is a limited opportunity for capacity to respond; only so many power plants can be built on 5 years’ notice. The main expected impact of Hinkley’s delay on the energy mix then is an increase in the utilisation of existing capacities, meaning more generation from gas, and a greater reliance on imports, both of gas and electricity.

Gas is obviously not free, and has not been much further from being free than in the last 2 years. Even if gas prices ease from recent highs by the end of the 2020s, we can still expect increased dependence on gas generation to push up prices and emissions. Our analysis estimates that the baseload price, the average wholesale price of electricity, will be pushed up by more than £5/MWh (in today’s money) in 2029 by Hinkley’s absence. For reference, the baseload price for this January was around £74/MWh. The total cost of this increase will be about £3.6 billion across the whole market.

The associated emissions from this are likely to add up to around 6.2Mt of CO2, equivalent to about 6 million round-trip flights from London to New York.

So, unsurprisingly, it’s bad news. Higher costs, more emissions, less independence. Bad day for the GB energy market. Straightforward, no?

Silver linings: avoided costs & wind to the rescue

If you’ve been following Hinkley Point C, you will be aware that it was financed under a Contract for Difference (CfD) arrangement, which guarantees the plant generation will be paid at a price of £92.5/MWh (in 2012 prices). That translates to roughly £116/MWh in 2022 prices. At the risk of stating the obvious, if the plant isn’t running, that price doesn’t have to be paid.

This avoided cost of not paying for Hinkley C’s CfD is substantial, adding up to £1.6 billion over the 3 years we are considering here. That offsets a bit less than half of the cost of rising wholesale prices from the delay to Hinkley C.

Hinkley C is not the only low-carbon generator on a CfD, though. The main recipient of CfD funding to date has been offshore wind capacity, which by 2030 will make up more than a third of our generation mix. As a result, these plants have effectively fixed prices for energy, and regulators have essentially hedged that generation against future price increases. Any increase in relative price of wholesale power is recovered, so long as the generation is coming from CfD-backed generators.

So, good news then! Of the total wholesale cost increase of £3.6 billion, almost 90% will be avoided or recovered via the CfD mechanism. Of course, this is a somewhat simplified analysis. Not all offshore wind will have subsidies, a significant amount will be backed by PPAs, and significant quantities of solar and onshore wind generation will be backed by CfDs. Overall, I am probably undercounting the hedging impact of the CfD scheme slightly, especially the contribution from onshore wind, which secured almost 1GW in the latest auction alone.

Bad news: the capacity market

Understanding the value of firm capacity is notoriously difficult. The Capacity Market (CM) buys new generation capacity with contracts lasting 1, 3 or 15 years, at varying de-rating factors and whatever price the market clears at.

Nuclear plants are de-rated at about 80% in the CM, so Hinkley’s 3.2GW amounts to a shortfall of about 2.56GW. As a plant with subsidies, Hinkley is precluded from participating in the CM but is still counted as a part of the capacity stack that contributes to the overall firm capacity target.

Renewables and batteries have low de-rating factors in the CM, and there’s not much capacity that could be deployed as soon as 2028. A key consequence of this is that the plants that are actually procured by the CM are often conventional, unabated plants that are otherwise troubled by regulatory risk associated with Britain’s Net Zero targets. With an incumbent government promising Net Zero by 2035, and an opposition with a sizeable polling lead promising the same by 2030, investors are looking to recover most, if not all, of their costs via the CM, where revenues are contracted.

The Capacity Market broke all records last year, and is likely to break them again in the coming auction, signalling an increasingly challenging environment for conventional generators

Last year, the CM secured 4.6 GW of Capacity, including a £1.5 billion contract for EPUKI’s 1.6GW Eggborough plant. The whole auction carried a cost of £5.7 billion, which will be recovered from end consumers. In crude terms, Hinkley’s absence creates half that level of shortfall, so even if it created exactly half of the costs, that would still be the most expensive consequence of its delay.

Conclusions: bad for consumers, bad for confidence

The delay to Hinkley C is bad news coming at a worse time. Costs for consumers will go up in the middle of a cost-of-living crisis. Emissions will go up within striking distance of the government’s stated net zero target, to say nothing of the ambitions of a potential Labour government to accelerate that target to 2030. Britain will become more dependent on imports from Europe for its energy supply at a time when “energy sovereignty” is just beginning to fade from the political discourse. I have restrained myself from talking about the transmission grid and the supply chain, but these areas that are already under strain will continue to be stretched.

Industry confidence in nuclear generation, which is increasingly shaky, continues to fall. Regulators globally will be more nervous about committing to strategies and targets that depend on nuclear for their delivery. The UK government’s own targets to reach 24GW of nuclear by 2050 look increasingly challenging, and the difficult question of how to maintain security of supply for a net zero system remains unsolved and more pressing than ever.

The major factors containing the cost overrun of Hinkley Point are its CfD contract, and the CfD contracts held by renewable generators. With future plants, including Sizewell C, seeming likely to be financed under the RAB model, the costs of overruns will be passed to consumers. In theory this is all incorporated into a lower cost of capital, but in GB in 2024, a bet against nuclear delays feels like a bad one.

In short, the delay of Hinkley C is bad news for everyone, unless they happen to own an unabated gas plant or an interconnector, of course.