Hinkley Point: the dreadful deal behind the worlds most expensive power plant

The long speak: Build Britains first new nuclear reactor since 1995 will cost twice as much as the 2012 Olympics and by the time it is finished, nuclear power could be a thing of the past. How could the government ten-strike such a bad deal?

Hinkley Point, on the Somerset coast, is the biggest construct site in Europe. Here, on 430 acres of blurred domains scattered with towering cranes and bright yellow diggers, the first brand-new nuclear power station in the UK since 1995 is gradually taking shape. When it is finally accomplished, Hinkley Point C will be the most expensive power station in the world. But to reach that stage, it will need to overcome an exceptional tangle of financial, political and technical difficulties. The project was first proposed virtually four decades ago, and its progress has been glacial, having faced relentless opponent from politicians, professors and economists each step of the way.

Some commentators of the project have questioned whether Hinkley Point C’s nuclear reactor will even operate. It is a new and controversial layout, which has been bird-dog by structure both problems and has already been to start functioning anywhere in the world. Some experts believe it could actually prove impossible to construct.” It’s three times over costs and three times over day where it’s been built in Finland and France ,” says Paul Dorfman, from the UCL Energy Institute.” This is a miscarried and miscarrying reactor .”

Others have pointed to the cost. At present, the estimated total statute for Hinkley Point C is PS20. 3bn, more than twice the London Olympics. To pay for it, the British government has entered into a complex fiscal agreement with Electricite de France( EDF ), the vigour giant that is 83% owned by the French government, and China General Nuclear Power Group( CGN ), a state-run Chinese energy company. Under this contract, British energy consumers will fee billions over a 35 -year period. According to Gerard Magnin, a former EDF director, the French company insures Hinkley as” a direction to construct the British fund the renaissance of nuclear in France “. He added:” We cannot be ensured that in 2060 or 2065, British pensioners, which is now at school, will not still be paying for the advancement of the nuclear industry in France .”

Many British commentators agree that the bargain is ludicrously favourable to EDF-” a horrible bargain, laughable” says Prof Steve Thomas, who works on energy policy at the University of Greenwich. But even insiders at EDF aren’t entirely happy with it. In the months before the EDF board finally signed off the deal in autumn 2016, the finance director renounced, together with Magnin.” The Hinkley Point job remains very risky ,” Magnin was just telling me. He is particularly concerned about EDF’s ability to complete the project before the present deadline of 2025.” Why have we reached this degree ?” requested Magnin.” It is the construction of a house of cards .”

Not everyone has lost faith in development projects. When John Hutton was business secretary in 2008, he announced that the government would encourage the” safe and affordable” development of nuclear reactors. Back then, he insisted the flowers would be completed” well before 2020″, and wouldn’t receive a penny in subsidies from the British government. Today, despite those earlier promises having been broken, Hutton still lobbies for nuclear:” We’re not just generating power station ,” he told me.” We are constructing history .”

But the irony of Hinkley Point C is that by the time it eventually starts operating, it may have become obsolete. Nuclear influence is facing existential troubles around the world, as the cost of renewable energies fall and their popularity grows.” The maths doesn’t work ,” says Tom Burke, former environmental policy consultant to BP and visiting prof at both Imperial and University Colleges.” Nuclear simply doesn’t make sense any more .”

The story of Hinkley Point C is that of a chain of decisions, taken a number of dozens of people over virtually four decades, which might have established appreciation in isolation, but today result in an virtually unfathomable clamber of the development of policies and aspirations. Promises ought to have made and transgressed, plans have been adopted then plunged then adopted again. The one thing that shall be equivalent is the projected rate, which has rocketed ever upwards. But if so many people have come to believe that Hinkley Point C is fundamentally shortcoming, the question remains: how did we get to this level, where billions of pounds ought to have sink into a project that seems fewer and fewer plea with each year that passes?

After winning the 1987 election, Margaret Thatcher’s government launched any intention to privatise the entire energy marketplace. But in the months following this announcement, it became clear that selling off Britain’s three dozen nuclear divisions was going to pose a problem. A former civil servant closely involved with the privatization recollected the shock of discovering the sheer magnitude of the risks and costs associated with the creaking first generation of nuclear plants. Whereas government policy papers could massage figures and establish optimistic projections, the prospectus, which provided financial information for potential investors, could not bend the truth.” A government newspaper was one thing ,” said the former civil servant,” but if the figures were misleading in the prospectus, it was a criminal offence. That was not at all like both governments article, to be honest. It was quite a moment for us all .”

The self-control chamber at Hinkley Point A power station, which opened in 1965. Photograph: Matt Cardy/ Getty Images

By 1989, it was clear that Britain’s nuclear sector has not been able to be privatised- corporations had little desire to take on the immense fiscal and practical perils.” The decommissioning rates are unbelievable ,” the former vigour secretary Chris Huhne told me.” In the 50 s and 60 s, they built them as though it were the pharaohs building the pyramids. It was:’ We’re never going to have to take them apart .'”

In 1990, as the privatisation of the energy market travelled ahead, Britain’s nuclear power plants moved into a state-owned corporation. By then, the government was already deep into the construction of Sizewell B nuclear power station, on the Suffolk coastline. Hinkley Point C was next on the list.

Six years later, previous generations of nuclear power stations were transferred into another state-owned corporation, while a brand-new private corporation called British Energy stepped forward to take over the eight most modern nuclear power plants in the UK. As British Energy took over its ready-built resources, it announced it would let the planning consent for Hinkley Point C relapse. Taking over existing nuclear power plants built financial sense; taking on the eyewatering cost of building brand-new ones did not. The current nuclear power plants would pass until the end of their projected lifespans, and then something else would have to close the gap.

But soon after its privatisation in 1996, British Energy began to run into fiscal questions. By 2002, the brand-new private corporation was in chaos, ultimately requiring a PS3bn bailout from the government. If the idea of having” too large to neglect” was to become a feature of Britain’s banking industry, it was already cooked into its nuclear business.

During Tony Blair’s second word as “ministers “, the Cabinet Office was tasked with examining the UK energy industry. When it delivered its report in February 2002, the message was clear: the costs and danger of building brand-new nuclear power plants should be left to the private sector.” It said that although nuclear shouldn’t be ignored, it was at present economically out of the question ,” says Gordon MacKerron, prof of science and technology plan at the University of Sussex, who was an adviser on the review.

By the end of 2003, all government policy was pointed out that Hinkley Point C would never be built, and there was no expectation of any other brand-new nuclear power plants. It seemed certain that nuclear “havent had” future in Britain- which is why, when the governmental forces performed a volte-face three years later, so many onlookers were astounded.” Without any obvious change in the world, by 2006, the position in government had been completely overruled ,” MacKerron told me.” Nuclear power had become extremely beneficial, important and not uneconomic .”

One thing that had happened in the intervening years was a PR blitz by the nuclear industry, which had deployed scores of lobbyists, including former legislators such as the former vitality rector Brian Wilson, to push the idea of a” nuclear renaissance” in the UK. Between 2003 and 2006, says Andrew Stirling, professor of science and technology policy at Sussex University,” Britain interpreted the start of a massive pro-nuclear lobbying and PR campaign that continues to this day .”

Through the media and advertising campaigns, key contents were hammered home. Renewables were intermittent and unreliable. Overseas gas imports were politically vulnerable. “Green” nuclear was the only plausible way to hit carbon dioxide reduction targets. Keith Parker, who was then chief executive of the Nuclear Industry Association( NIA ), told the New Statesman that the 2005 election became a particular focus for swaying beliefs.” It gave us a good chance to raise the specific characteristics of nuclear power ,” he said. In the months leading up to the election, a series of talks was organised at exclusive venues such as the Army& Navy Club on Pall Mall and St Stephen’s Club in Queen Anne’s Gate. Industry leaders and experts came together to explain the benefits of nuclear to politicians and energy writers. The NIA( which is now chaired by John Hutton) took on the role of managing the influential all-party parliamentary group- an informal classify of legislators- on nuclear energy.

In July 2006, the governmental forces U-turn arrived in the form of a brand-new policy newspaper, The Energy Challenge, which declared that brand-new nuclear power stations would be necessary to help Britain reduce its carbon emissions and to ensure an uninterrupted, affordable furnish of energy well into the future.

Greenpeace launched a legal objection, claiming that the consultation process behind the government’s recommendation had been totally inadequate. The magistrate is president of the example concurred, and in February 2007 ruled that the process had been “misleading”, ” very seriously shortcoming” and” procedurally unjust “. Blair accepted the ruling, but went on to state that” this won’t alter the implementation of policies at all “.

Andrew Stirling believes that there was a crucial, largely unspoken, reason for the government’s rediscovered fervour for nuclear: without a civil nuclear industry, a commonwealth cannot maintain military nuclear capabilities. In other words , no brand-new nuclear power plants would spell the end of Trident.” The only countries in the world “that theyre” looking at large-scale civil power newbuild programmes are countries that have nuclear submarines, or have an expressed intent of acquiring them ,” Stirling told me.

Building nuclear submarine is a ferociously complicated business. It necessitates the kind of institutional recollection and technical expertise that can easily disappear without practice. This, in theory, is where the civil nuclear industry be coming back. If brand-new nuclear power plants are being built, then the skills and capacity required by the military will be maintained.” It searches to be the case that the federal government knowingly engineering an environment in which energy customers cross-subsidise this limb of military security ,” Stirling told me.

In May 2007, the government published a newspaper titled” Meeting the vigor challenge: a White Paper on energy”, which reaffirmed its enthusiasm for nuclear and declared that there had been” significant changes in the economics of nuclear power “. In differ to the late 1980 s, the government claimed it was now being approached by” some energy companies carrying a strong interest in investing in brand-new nuclear power stations “.

The Quantock mountains in Somerset, looking towards the locate of Hinkley Point. Photo: Deeplyvibed/ Alamy Stock Photo

When Gordon Brown took over from Blair in June 2007, the shifting to nuclear proceeded apace. As it happened, the brand-new prime minister’s brother, Andrew, was then the communications director for EDF, though a spokesman for Gordon Brown told him that at no level while he was prime minister” did he was never debate energy policy with Andrew Brown “.

In January 2008, the announcement came. A new generation of nuclear power stations in the UK was afforded formal backing by the government.” It was one of the most exciting periods in my ministerial life ,” says Hutton.” Diplomats do lots of important things all the time, but there are probably those times in your ministerial job when you sit back and think:’ Actually, this is going to have an intergenerational influence. This is going to affect the country 50, 60, 70 years after I’ve gone .'”

The development at the top of the listing was Hinkley Point C.

Just as it was like Hinkley Point C would go ahead, the banking crisis exploded.” The gate-crash pretty well changed everything ,” Hutton told me. The private corporations, such as E.ON and Centrica, which has hitherto expressed interest in funding the new nuclear power plants, pulled out. If the UK government wanted to go ahead, it would have to pay for the power plants itself. This was a complete departure from its most recent insisting that representatives of the private sector would shoulder both the growth costs and hazard.” It was agreed on one basis, and then they moved to another ,” says Molly Scott Cato, the Green MEP for the south-west of England.

Despite financing of the chaos, the government was still have decided to make Hinkley work.” There had to be a different route received ,” Hutton said. The key fragment of the jigsaw was British Energy. The company, which had been drew back from near-collapse by the government in 2002, owned many of best available websites for constructing brand-new nuclear power plants. If the governmental forces wanted private companies to build nuclear power plants, it would have to sell British Energy to one of the companies.

Various purchasers were considered for British Energy in 2008, with EDF the keenest.” At one point, we tried to get Centrica and British Energy to work together ,” said a former senior civil servant.” But the department very quickly realised it would be like two drunks bending together for aid. EDF was the best bet .” With no real scheme B after representatives of the private sector had lost interest in Hinkley Point, the governmental forces suddenly discovered itself in a weak negotiating power.” They perhaps didn’t foresee that simply one developer, EDF, was prepared to go ahead ,” said MacKerron.” So by definition, the latter are a bit over a barrel .”

In September 2008, British Energy was sold to EDF. After months of long and difficult negotiations between EDF and a team of civil servants representative of UK’s interests in British Energy, and an earlier neglected entreat, the French corporation paid PS1 2.5 bn to take over eight UK nuclear power plants. It also announced its plan to develop four brand-new power stations.

These days, EDF looks like an unlikely white knight. The market value of the company has collapsed, from more than EUR1 50 bn( PS132bn) in 2008 to roughly EUR3 0bn( PS26bn) today, and the French nuclear industry is facing an existential crisis. Because many of the 58 nuclear reactor in France were built in the 1970 s, they are now reaching the end of their lifespan simultaneously. Not merely is France’s nuclear industry facing the costs of decommissioning, which were grossly underestimated, but virtually no brand-new nuclear power stations are being built. At present, nuclear energy furnishes about 75% of France’s electricity, so the potential for a disastrous vigour shortfall is growing by the day.

To make problems worse, EDF’s attempt to build its first new nuclear power station for years has turned into an shame. Flamanville, on France’s northern coast, has been beset by overruns since structure started in 2007. It is currently projected to cost EUR1 0.5 bn( PS9. 2bn)- a steal compared to Hinkley, but still three times its original fund. The Flamanville reactor is a new European pressurised reactor( EPR ), the same troublesome layout that is planned for Hinkley.

Magnin, the administrator who resigned from the board of EDF last year, told him that the company assures Hinkley Point as crucial to proving” that nuclear and EDF are still a reality for the 21 st century “. He added:” If it runs, it could be good business. But there is a risk that it won’t work, and then everyone forgets .”

The financial deal that EDF struck with the British in October 2013 to fund the project- which, in Magnin’s words, amounts to the British taxpayer funding France’s energy requirement- remains one of the most controversial the components of the Hinkley deal.

Given its commitment to building Hinkley Point C, the government had no choice but to construct EDF an present that was too good to defy. It offered to guarantee EDF a attached cost for each unit of energy produced per Hinkley for its first 35 years of operation. In 2012, the guaranteed price- known as the” strike price”- was set at PS92. 50 per megawatt hour( MWh ), which would then rise with inflation.( One MWh is approximately equivalent to the electricity used by around 330 homes in one hour .)

This means that if the wholesale price of energy throughout the country falls below PS92. 50, EDF will receive an extra payment from the consumer as a “top-up” to fill the crack. This will be added to electricity bills around the country- even if you aren’t receiving energy from Hinkley Point C, you will still be making a payment to EDF. The current wholesale price is around PS40 per MWh. If there had been no inflation since 2012, “consumers interests” would be paying an EDF excise of around PS52. 50 per MWh produced at Hinkley. Nonetheless, because it is linked to inflation, the ten-strike rate have so far been been increasing since 2012.( The cost will be reduced by PS3 if EDF develops another new reactor in Sizewell in Suffolk, as it is planning to do .)

A cement batching plant at the Hinkley Point C build area, September 2016. Photograph: Bloomberg via Getty Images

In short, instead of using taxpayers’ money to fund a nation subsidy for EDF, the governmental forces negotiated a bargain whereby the energy consumer foots the invoice. Passed that virtually every taxpayer in the UK is an electricity consumer, the difference is largely academic. Furthermore, people in a lower taxation bracket often use a similar sum of energy to higher earners, effectively generate a regressive excise.” The ten-strike cost was set when ability costs were very high. They signed the contract when there was a bubble ,” Juan Rodriguez, an psychoanalyst at equity research firm AlphaValue, told me.” It’s a brilliant deal for EDF .”( By comparison, the Department for Business, Energy and Industrial Strategy maintains that” the governmental forces negotiated a competitive bargain “. A representative from EDF told me:” The UK Government agrees that Hinkley will be delivered appreciate for money for consumers and that the overall costs of the energy system are lower with nuclear as part of the concoction than without it .”)

The deal looks specially bad when compared with the current cost of renewable energy. As Hinkley’s pricetag maintains rising, the cost of energy deters falling. And, as a recent report from the public reports committee pointed out, although energy costs are falling, this just drives up the top-up pay to EDF.” No one was protecting the interests of energy consumers in doing the bargain ,” the report noted.

In December 2013, the European committee decided that the payments to EDF were so big-hearted that they could contort the energy rate across the whole of Europe, and launched an investigation into the bargain. The resulting record, are presented in 2014, can be read as a 33,000 -word attempt by the EU to save the UK from its own poor negotiating.

The commission created several issues. First, it stated that the payout to EDF would give the company a huge and unjustifiable advantage over its contestants. The strike price arrangement was designed” to altogether eradicate sell probabilities from the commercial activity of electricity generation “.

Second, it noted that EDF has been meticulous in passing on as much danger as is practicable to the British government. The contract included a government secure for any obligation that EDF required from the financial markets to fund construction of the plant. Separately, if a nuclear catastrophe reaches Hinkley, EDF is also shielded.” We’re insuring it, so if there is a disaster, it comes back to the public ,” says Molly Scott Cato, the MEP.” Nuclear never has and cannot exist in a private marketplace giving .”

One of the most serious concerns in the EU’s assessment was over the estimates for the “gap” between the wholesale energy cost and the ten-strike cost. That gap is currently around PS50. Once Hinkley starts operating, the European Commission pointed out, EDF’s market share will be so substantial that it could have the ability to manipulate the wholesale electricity sell. Depending on the how the ten-strike rate is calculated, there might be an “incentive”, the commission noted, for EDF to” behave strategically” to” influence the reference cost “. For instance, if EDF abruptly sold a lot of energy on to the market at a pre-planned period, the wholesale price could drop substantially. The lower the wholesale price, “the worlds biggest” the difference from the secured ten-strike price, and therefore the higher the” EDF taxation” pay back buyers. As the commission on human rights threw it, there remained a question over how a” vertically integrated operator” might” react to such an incentive frame “. EDF will have a duty to its shareholders to maximise its profits. But as the commission makes clear, at the same time, the company will have the capacity to move the wholesale electricity sell at certain precise days, in a way that could benefit stockholders substantially.

EDF declined to comment on this phase. A spokesman for the Department for Business, Innovation and Skills said that the vigor regulator, Ofgem, are accountable for oversight of the wholesale energy sell.” They have a variety of investigatory and enforcement abilities at their disposal for the spotting and prevention of price manipulation by market participants ,” said a spokesperson.

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