The U.K. government’s decision to guarantee as much as 10 billion pounds ($15 billion) in debt for the first nuclear power station in two decades helps ensure Electricite de France SA will support construction of the plant.
Treasury Chief Secretary Danny Alexander announced backing for the project in southwest England yesterday as the Energy Department outlined subsidised rates for wind and solar power of at least 100 pounds per megawatt hour for the next three years. EDF has indicated it needs about 95 pounds a megawatt hour to move ahead with the project.
The decisions fanned speculation that Prime Minister David Cameron’s government is preparing to announce incentives strong enough to prompt EDF to build the plant. Nuclear along with offshore wind is at the heart of Cameron’s program for replacing the fifth of the nation’s power generation that’s scheduled to retire from service within 10 years.
“It’s helpful for the project to go ahead, but also helpful in terms of government eventually being able to sign a contract that has a strike price that looks half way reasonable,” said Peter Atherton, an analyst at Liberum Capital Ltd. in London.
Loan guarantees are crucial for EDF to reduce the risk of building and financing the proposed Hinkley Point C reactors. The guarantee, which acts as an insurance policy for providers of funding that they will get paid, will reduce the cost of debt needed to fund the project by allowing EDF to borrow at rates close to what the government pays, Atherton said.
Britain hasn’t built nuclear power plants since 1995 and is seeking 110 billion pounds of investment in its aging power generation and electric grid network.
The government and EDF remain locked in talks about the price the U.K. will pay for nuclear power, which EDF has said is the most important issue determining whether it will move ahead. EDF didn’t have an immediate comment.
The guarantee was announced as Britain unveiled it would pay offshore wind developers triple the market price for electricity they generate to 155 pounds ($237) per megawatt-hour, from next year. Onshore wind farms get 100 pounds a megawatt-hour for the next three year, and large solar plants 125 pounds next year and the year after.
“The read-across to nuclear is positive,” Dominic Nash, an analyst at Macquarie Securities. (MAQIISF) “If you’re at those sort of levels for a lot of those technologies, it makes it easier to give a higher price for nuclear.”
EDF is seeking at least 95 pounds a megawatt-hour, a person familiar with the matter said in February. Discussions between the government and EDF are “intense and constructive,” Energy Secretary Ed Davey said in London, declining to give a timetable for an outcome. His department said it will only sign a contract that provides value for money and that’s fair and affordable.
The U.K. Treasury department said it agreed to pre-qualify Hinkley Point C plant for the 40 billion-pound guarantee program it first announced in July 2012. Drax Group Plc (DRX) in April won a guarantee on finance to fund conversion of its coal-fired power station to biomass.
EDF will pay commercial rates for the guarantee, which isn’t a subsidy since it’s part of a program available to other energy projects, Davey said.
“The government’s award of a guarantee for Hinkley before a contract has even been signed is a nothing but a blank check to the industry,” Greenpeace Chief Scientist Doug Parr said in a statement. “This is not a surprise as no one seriously believes nuclear can happen without a massive subsidy.”
Nuclear power has been generating in the U.K. for the past five decades. All except one of the U.K.’s nuclear plants is due to close by 2023. While there is no government target for nuclear, industry has plans to develop about 16 gigawatts of new atomic power. The U.K. has about 82 gigawatts of generation capacity, according to the Ofgem electricity regulator.
“A really big part of the issue there is the cost of the financing,” Atherton said. “Anything you can do to bring the cost of financing down has a big impact on the overall economics of the nuclear station. That’s where so much of your cost is.”
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