Industry Highlights

The news of the hour, so to speak, or more likely of the year, is the deal struck between French state utility EDF and the UK government, which will see the first nuclear power station built in Britain in 20 years.

On Monday, 21 October, Britain and the world finally found out the commercial terms for building Hinkley Point C, a 3.2 GW two-reactor nuclear plant, slated to be operational by 2023.

It may have taken a year of talks, but it appears that both parties – EDF and the British government – have come away from the negotiating table happy.

Considering rising energy costs are currently a political ‘hot potato’ with the British electorate, Energy secretary Ed Davey must have been relieved to be able to confirm that EDF and its fellow investors would be fully responsible for funding the à‚£16 billion ($26 billion) project, representing “for the first time” a nuclear power project “not built with money from the British taxpayer”.

EDF is also likely to be pleased with a strike price of à‚£92.5/MWh, which is closer to the alleged à‚£100/MWh it was after than the à‚£80 originally offered by the government. One also presumes that, from an investor’s point of view, the EDF strike price will serve as the benchmark for any subsequent nuclear projects.

This strike price, nonetheless, has raised a few eyebrows, with some industry commentators pointing out that it is almost twice the current wholesale cost of electricity.

However, others make the good point that it is not correct to compare it with the wholesale power price because this covers only operating costs, so you are not comparing ‘apples with apples’.

Instead, says Gerard Wynn, Reuters’ senior environmental markets correspondent, you should compare it with the calculated, complete cost of power generation, which includes both capital and operating costs. In those terms, the strike price appears cost competitive with large-scale renewable energy, although still more costly than gas.

Now, before I give you the impression that Wynn is in favour of the UK having a nuclear-build programme to secure supply, let me be clear and say he is not. Rather he advocates investment in new subsea cables. He points out that on the same day as the Hinkley Point C announcement was made, Alexa Capital, a UK-based corporate advisory firm, released a report called UK energy in perspective: is there a better way forward?

The report argues that: “The UK’s ‘energy island’ strategy for security of supply is not practical in light of excess power capacity across the EU”, believing UK business and consumers would not be better off contracting for a greater proportion of electricity via interconnection.

An ideal interconnection partner, proposes Wynn, is Germany, where a combination of high natural gas prices, low power prices and priority dispatch for renewables has seen several utilities mothball loss-making gas-fired power plants. Thus, says Wynn, the UK could exploit the situation and offer a long-term power purchase agreement to keep those German plants operating.

With the cost of building an interconnector anticipated to add only a few euros per MWh to the cost of importing electric power, Wynn concludes that the complete cost of purchasing electricity from Germany’s gas-fired power plants could well be cheaper than the new Hinkley Point deal.

Notwithstanding Wynn’s opinion, the general response to the Hinkley deal has been positive. Tony Ward, head of power and utilities at Ernst & Young, believes this “investment will have a lasting positive impact on the UK’s energy independence, its economy and low-carbon aspirations”.

Whilst George Borovas, head of international nuclear projects at global law firm Pillsbury, says the deal could have a “positive domino effect”, with additional new build projects likely to follow. I’m sure Hitachi, following its purchase of Horizon 12 months ago, and GDF Suez’s NuGen are reassured by this development.

Finally, the UK government will definitely see the Hinkley Point C deal as a vindication of its often criticised EMR (Electricity Market Reform) programme, the aim of which was to bring clarity, certainty and confidence to energy investors. I’m sure Davey and his team are punching the air and saying “we did it”.

Dr. Heather Johnstone à‚  Dr. Heather Johnstone, Associate Publisher www.PowerEngineeringInt.com

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