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Will Hinkley Point Power Plant Make Enough Money?

Dr John Constable: GWPF Energy Editor

The UK government has, after some delays, given approval to Hinkley C nuclear power station. However, and in spite of subsidies intended to offset risks arising from renewables policy, it is still not clear that the project can actually make money. It remains to be seen whether EDF has the courage to proceed.

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The British government has decided to approve the Hinkley C nuclear power station, subject to a number of conditions relating to the sale of EDF’s share. These are intended, it is said, to ensure that “the full implications of foreign ownership are scrutinised for the purposes of national security”. Future projects will have a similarly designed “special share” giving HMG the power to “ensure that significant stakes cannot be sold without the Government’s knowledge or consent”.

This gives the appearance of resolving the concerns aired when the Prime Minister delayed approval on the grounds of possible risks to national security arising from overseas investment in such infrastructure, particularly from China.

Unsurprisingly, this is nowhere near the end of the story. The British government has now given fair warning both to EDF and the Chinese government that it is only lukewarm about this project, and is unlikely to consider augmenting the fixed price, of £92.50/MWh, which will almost certainly be a large subsidy since wholesale prices are expected to be much lower than this for the majority of the project’s lifetime. If EDF were gambling on being able to obtain a little more support from the British consumer at a later date, from capacity payments perhaps, they should now realise that this is unlikely to happen. Is the deal as it stands sufficient to allow EDF and its partners to invest? Perhaps not.

The price per MWh, may look right now, but there is no guarantee that they be will able to sell enough of their output to turn that price into the required income.

Of course, it is widely assumed in much press comment that Britain is facing a crisis and desperate for electrical energy. This is not strictly speaking true. On current projections, the UK will have a vast renewable electricity generating fleet; 54.5 GW currently has planning permission, according to government’s own Renewable Energy Planning Database, and there is a further 10 GW of capacity still in the planning system. Together this capacity is sufficient to generate about 170 TWh of energy, more than 50% of current electricity consumption.

However, while this is a large volume, the renewable fleet is, for the most part, uncontrollable and cannot give a strong guarantee of delivering this energy at the rate it is required when it is required. Hinkley C, of course, can do exactly this. But it is entirely conceivable that however vital Hinkley might be to security of supply as a provider of joules per second on demand, it would ultimately be selling volumes of electricity amounting to rather less than the 25 TWh that could be generated annually if it achieved its theoretical 90% load factor. With a strike price of £92.50/MWh that 25 TWh would generate income of about £2.3bn a year, half of which would be subsidy assuming that wholesale prices are roughly as they are today. That may seem fairly generous when set alongside the capital cost of £18bn, but cost overruns, Operations and Maintenance, and less than maximal sales may pare away much of this buffer. It would be interesting to know what actual load factor is needed for the project to be viable. Perhaps EDF is not really sure.

Lest this seems a needless anxiety, it should be recalled that 25 TWh really is a very large quantity of electrical energy, about 8% of current total consumption. Assuming that current UK demand does not rise and all the renewable plant described above is actually built, Hinkley would be capable of producing about a staggering 20% of the remaining annual demand. We can be sure that EDF is hoping that it would run undisturbed as a base-load provider, but the reality is that it could face stiff competition for the remaining market, not least from new generation gas turbines, which will be very cheap, and extremely flexible.

Much therefore depends on the scale of future UK demand for their electricity, and this is notoriously difficult to predict. Writing in 1984, two very competent analysts, Bending and Eden, foresaw consumption of between 452 and 666 TWh per year in 2020 (Richard Bending, Richard Eden, UK Energy: Structure, prospects and policies (Cambridge UP: Cambridge, 1984)). Current consumption is somewhat under 300 TWh. Things may change in the next four years, but it is unlikely that demand will rise to anything like those levels. Indeed, British Final Electricity Consumption (FEC) has been falling since approximately 2005, when it peaked at 349 TWh per year, and it has now returned to levels not seen since the early 1990s, and continues to fall.

The question therefore, is whether EDF can be confident that the UK’s consumption of electricity will recover sufficiently to give Hinkley a market large enough to turn the strike price into the required cash flow. Scandalous though the subsidy for Hinkley genuinely is, the truth is that it may not be remotely sufficient to make this power station viable in the policy-distorted market that is already a reality and is set to get worse.