U.K. Nuclear Future Relies on Reactor Plagued by Delays: Energy

To ensure the future of its nuclear power industry, the U.K. is relying on an unproven reactor design plagued by delays and billions in budget overruns.

The government’s deal yesterday with Electricite de France SA to build a $26 billion plant at Hinkley Point in England involves two European Pressurized Reactors. The first EPR project in Finland, led by Areva SA, the French company that designed the technology, is seven years behind schedule and won’t be completed until 2016. The second, an EDF project at Flamanville in northwest France, will cost more than twice as much as expected.

EDF says the lessons learned mean Hinkley Point will go more smoothly and that both the budget and time frame set out yesterday are realistic. History suggests the plan for the U.K., which needs to replace aging reactors built in the 1970s, isn’t ironclad, said Roland Vetter, head of research at CF Partners (UK) LLP, which runs a fund that invests in utilities.

“Nuclear is the biggest gamble in power generation,” said Ingo Becker, an analyst at Kepler Cheuvreux in Frankfurt. “At 16 billion pounds ($26 billion) for two EPRs, they have probably taken into account possible cost overruns.”

Billed as safe enough to withstand an airplane crash, the EPR reactor is at the heart of EDF and Areva’s hopes for a revival in nuclear power as a French export industry. The U.K. has remained committed to nuclear even after the Fukushima disaster in Japan turned others off atomic generation, including Germany, which decided to shut all its reactors.

Soft Soil

EDF has set a budget for the two 1,650-megawatt Hinkley Point reactors based on the latest estimate for Flamanville of 8.5 billion euros ($11.6 billion) for a single unit.

The U.K. project, expected to take 10 years, will be more expensive because soft local soil means it needs deeper foundations, requiring 30 percent more concrete, EDF said in a presentation yesterday. The Paris-based company also has to build an atomic waste facility and 3.8-kilometer (2.2-mile) pipes to carry seawater to cool the reactors.

“We are very confident in the cost,” Vincent de Rivaz, head of EDF’s U.K. unit, said at a London press conference yesterday. “We are a company which is able to learn from its experiences.”

EDF points to its project to build two EPR reactors at Taishan in southern China as evidence it can deliver in the U.K. The plant, built in partnership with China General Nuclear Power Corp., will start commercial operation in 2015, EDF said yesterday. That’s only a year later than originally planned. China General and China National Nuclear Corp. will hold minority stakes in the U.K. project.

Greater Certainty

The U.K. design assessment means “you have much greater regulatory certainty at the start,” Energy Secretary Ed Davey said yesterday. “That wasn’t the case in previous projects with the EPR.”

The EPR was criticized in France for being too big and costly after an Areva-led group lost a $20 billion atomic contract from Abu Dhabi in 2009.

“The credibility of both the EPR and the ability of the French nuclear industry to successfully build new reactors has been seriously undermined by difficulties” at Finland’s Olkiluoto site and Flamanville, according to a report ordered by former President Nicolas Sarkozy and published in 2010. It found the plant’s complexity was “a handicap.”

Even though work on Areva’s Olkiluoto-3 project started in 2005, the U.K. has opted for a design that’s yet to be completed. The Finnish plant is now scheduled to start in 2016, seven years behind schedule, operator Teollisuuden Voima Oyj said in February. Areva has said the reactor will cost the same or slightly more than Flamanville.

60 Years

“The technology takes 10 years to build and is supposed to run for 60 years, so it’s hard to evaluate,” Becker said. “It’s now known that costs are rather high for the EPR.”

At Flamanville, EDF has pushed back the commercial start of the generator numerous times and revised cost estimates three years in a row. In December, the state-controlled utility raised the estimate to 8.5 billion euros, more than double the initial budget, and confirmed a 2016 target start date.

EDF began building the Flamanville reactor in December 2007, initially estimating costs at 3.3 billion euros and with plans for a 2012 start.

Building two EPRs at Hinkley Point will cost 14 billion pounds, an estimate “in line” with the costs of Flamanville, EDF Chief Executive Officer Henri Proglio said yesterday on a conference call. The utility has tagged on another 2 billion pounds for acquiring land, installations for waste storage and training 900 employees to operate the plant.

Learned Lessons

“There is a series effect since we learned lessons from Flamanville and Taishan,” Thomas Piquemal, EDF’s head of finance, said on a conference call yesterday. Developing another EPR at Flamanville would shave 2 billion pounds from the costs of the first one, he said.

Although work at Taishan in China has also fallen behind schedule, it’s progressing faster than the European projects. Key milestones were reached two years faster than in Finland, according to Areva, which will take a 10 percent stake in the Hinkley Point project.

“The EPR meets all expectations of the U.K.,” said Charles Hufnagel, Areva’s head of communications. “The highest level of safety, competitiveness of low carbon generation, and certainty for the project thanks to the U.K. licensing and lessons learnt from four EPRs under construction in the world.”

In the event development of the U.K. reactors follows the European trend rather than the one in China, the U.K. may have to take steps to prevent generation shortages.

“Any delays could hurt energy planning in the U.K,” said CF Partner’s Vetter, who helps manage a fund that invests in European utilities. “The U.K. would have to make sure there are alternative power sources.”

Before it's here, it's on the Bloomberg Terminal.