U.K. Risks Looking ‘Economically Insane’ on EDF Nuclear Deal

The U.K. committed to the world’s costliest power station when it agreed with Electricite de France SA to build the first new nuclear reactors in the country since 1995, according to Liberum Capital Ltd.

“We are flabbergasted that the U.K. government has committed future generations of consumers to the costs that will flow from this deal,” said Peter Atherton, a utilities analyst at Liberum. “Based on the disclosure so far this looks likely to be an outstanding deal for EDF and its partners.”

At a cost of 16 billion pounds ($26 billion), Hinkley Point C will be the most expensive power plant per megawatt produced, Atherton told clients of the London-based firm in a report. EDF is set for returns of as high as 35 percent and the contract may create cash dividends of as much as 80 billion pounds, he said.

The comments will inflame a battle over U.K. energy policy as the Conservative-led government and opposition Labour party accuse each other of failing to address voter anger over power bills that rose this month at three to four times the inflation rate. Conservative plans include adding atomic-power capacity, curbing green levies and spurring hydraulic fracturing for gas.

Prime Minister David Cameron this month hailed the accord with France’s EDF and its Chinese partners as “brilliant news” for jobs and investment that would help secure power supplies. Atherton has criticized U.K. energy policy in the past. He said in April the government underestimated engineering and economic challenges of plans to cut carbon produced by power generation.

Positive Domino

Some analysts have been more positive. The nuclear deal, with a guarantee from the U.K. treasury for debt used by the project, may spur more energy projects as they gain access to cheaper loans, CF Partners (U.K.) LLP and Accenture Plc said.

The agreement may have a “positive domino effect” as it removes uncertainty that has plagued the U.K. nuclear industry, George Borovas, head of international nuclear projects at law firm Pillsbury Winthrop Shaw Pittmann LLP, said on Oct. 21.

The U.K. agreed to pay EDF a so-called 92.50-pound strike price per megawatt-hour for power generated by the venture with China General Nuclear Power Corp. and China National Nuclear Corp., who will hold 30 percent to 40 percent of Hinkley Point.

The inflation-linked figure will probably be more than 121 pounds when the plant commissions in 2023 and for that to rival fossil fuels the price of gas will need to rise at least 130 percent from today, which is a “massive bet”, Atherton said.

“If that bet proves to be wrong, then this contract will look economically insane when HPC commissions,” he said.

‘Frankly Staggered’

“We are frankly staggered that the U.K. government thinks it is appropriate to take such a bet and under-write the economics of any power station that costs 5 million pounds per megawatt and takes 9 years to build,” Atherton wrote.

While EDF’s return on equity would start at just over 10 percent assuming an “unlevered scenario,” the project will probably employ debt finance that boosts the return, he said.

It would earn a return on equity of as high as 35 percent from 2027 should it finance the station in the southwest of England with about 85 percent debt, according to the analyst.

It may also generate cash dividends of 65 billion pounds at that debt level during the 35-year contract for Hinkley Point’s power, he said. That rises to 80 billion pounds should EDF fund the plant using all equity, Atherton said. EDF has said it will use as much as 65 percent debt to finance the two reactors.

Fair Deal

The U.K. Department of Energy and Climate Change said the plant will be competitive with gas-fired stations in the 2020s, as carbon costs and wholesale prices for the fuel rise, according to an e-mailed reply to questions. It would also be competitive with wind power, while consumers will be better off in a market with diverse power sources, it said.

EDF said the deal is a “fair one that has been rigorously tested by DECC’s professional advisers.” The power price makes Hinkley Point competitive or cheaper than other new, large power generation and the cheapest low carbon technology, the company said in an e-mailed statement.

The return balances the needs of consumers and the risk of investment, it said. The utility previously said it will get a rate of return of about 10 percent from the project in Somerset.

Britain announced the EDF deal on Oct. 21 after more than a year of negotiations. The government, offering a power price of almost double current market rates, said it was “excellent” for consumers, who wouldn’t pay anything for the plant upfront.

To contact the reporter on this story: Sally Bakewell in London at sbakewell1@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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