Striking a price for nuclear power

Striking a price for nuclear power

CategoryArticles Author Stephen Tromans KC Date

We have travelled some way since 2007 when Tony Blair’s government announced its support for a new generation of nuclear power stations. State support was not then on the agenda and they were seen as commercially viable projects. Indeed the Coalition agreement of May 2010 expressly recorded that the Conservative party was only in favour of new nuclear on the basis that it was subject to approval under the normal planning system (now not of course the case) and that it received no public subsidy. Now the government is locked in delicate negotiations with EDF as to the public support to be given for the energy the Hinkley Point C station will produce, should it be built; the brute fact being that without such subsidy no station will be built. One cannot envy the government that task. Failure of the new nuclear build project will have serious consequences for the UK’s low carbon energy strategy and possibly the security of supply. But on the other hand a price which is seen as too high will be seized upon by anti-nuclear and consumer groups alike as a failure by the government to stand up to commercial interests. Ed Davey’s speech to the Commons on 7 February 2013 was a master-class in seeking to justify the back-tracking on the “no subsidy” policy.[1]

There has been intensive discussion and speculation as to where the agreed strike price will end up. Electricity generated by offshore wind costs around £140/MW hour[2] as compared with a general wholesale price of around the £40 mark. Within the past few weeks, estimates for the strike price for nuclear have varied between a highly optimistic (for the government) figure of below £100, to as high as £160. Further, in February it was learnt that the proposal may now involve a guaranteed price for 40 years as opposed to the 20 originally contemplated – perhaps as part of an attempt to arrive at a package below the politically explosive figure of £100/MW hour.

DECC meanwhile is saying nothing other than that it is committed to a fair, affordable deal, representing value for money for consumers. One would certainly hope so, because the potential sums over a forty year period, depending on how wholesale energy prices move (and who would care to predict that over four decades?) are eye-wateringly huge. The new chief executive of RWE UK, Paul Massara (RWE no longer being a runner in the UK nuclear marathon) has been reported as urging great caution about a deal which could saddle consumers with unnecessarily high bills. Evidence to Parliament in 2012 suggested that a £5/MW hour mistake in the price could result in £4 billion additional costs to consumers by 2030. On the other hand, who in their right mind would commit to the up-front and long-term costs of new nuclear power plants, with their income stream left to the mercy of a volatile energy market based on oil and gas prices? In any event the whole programme could not be financed on balance sheet (though possibly a single station might) and hence the critical decision is that of the lending consortia, not simply the developer. What is clear is that all eyes will be on Hinkley Point C as the pilot or guinea pig, whatever the preferred analogy.

At present, as the House of Commons Energy and Climate Change Committee noted in its recent report on new nuclear build,[3] there simply is no “plan B” should new nuclear build not be forthcoming. The Committee thought the government was “overly reliant on aspiration and hope” and that “crossing one’s fingers is not an adequate or responsible approach”. As with everything, the devil will be in the detail of the deal if any which is struck. How much risk in terms of construction and other risk will be absorbed by the promoter of the project, and how much by the government? A good or reasonable deal might start to look very poor when such aspects are factored in, if construction cost overruns are capable of being passed through to consumers or to taxpayers through the UK Guarantees Scheme [4]introduced in July 2012. Flamanville, the EPR project in France, has of course suffered from severe construction cost over-runs but the Commons Committee also noted the statement from the President of its equivalent Committee in the French Assemblée Nationale that the revised build cost was expected to deliver a price for electricity of €74/MW hour. Transparency – as the Commons Committee rightly emphasises – is a big issue here.

Speaking of rocks and hard places, the government will have to negotiate the EU state aid regime in respect of any deal, a process which will not be straightforward and is likely to be a focus for anti-nuclear sentiment. [5] On the other hand, both the government and EDF as a foreign investor in infrastructure vital to the UK, will be acutely mindful of the body of law on investor protection, fair and equitable treatment, the obligation to fulfil any “acquired rights” through legitimate expectation, etc. Both France and the UK have ratified the Energy Charter Treaty, Part III of which deals with investment promotion and protection and which could offer EDF recourse in the event of any future falling out.
[1] See
[2] See
[3] Building New Nuclear: the Challenges Ahead (6th Report of Session 2012-13, HC 117) 4 March 2013.
[4] See
[5] See for example

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