The U.K.'s Nuclear Gamble
The U.K. government had to perform two distinct calculations in deciding to proceed with building a nuclear power station at Hinkley Point, one political and one economic. The political reckoning was always going to argue strongly against abandoning the project. The economics, however, went the other way. The sums don't seem to add up, and the result may be that the country ends up paying dearly in the coming decades for the decision.
Incoming Prime Minister Theresa May was right to review the Hinkley deal. After all, at 18 billion pounds ($24 billion) it will be the single most expensive construction on the planet (the Large Hadron Collider at CERN cost about $6 billion). But her maneuvering room was always limited.
After Brexit, the last thing the U.K. needs is to alienate countries that will influence its post-European Unit trading status. So angering France, whose Electricite de France is the lead contractor for Hinkley, and China, whose China General Nuclear Power is providing a third of the financing, was always unlikely.
There were also other compelling arguments for going ahead. The need for extra generating capacity is clear. The government estimates that electricity demand will increase by 20 percent in the next two decades, at the same time as the U.K. loses capacity as older nuclear- and coal-powered plants are taken offline. Hinkley is designed to deliver 7 percent of Britain’s electricity needs for six decades; this chart from the National Audit Office shows how important nuclear power is deemed to be for meeting the nation's future needs:
The deal sanctioned this week attempts to safeguard Britain's energy security by barring EDF from selling down its controlling stake prior to completion of construction without government approval.
That though, doesn't address the issue raised by Nick Timothy, now one of the prime minister's joint chiefs of staff, who warned last year that China's involvement might allow it to "shut down Britain's energy production at will." As my Bloomberg View colleague Eli Lake revealed earlier this week, government agencies in the West are increasingly concerned about Chinese control of the technology being implanted in infrastructure.
The key issue with the Hinkley project, though, is more prosaic than the risks of industrial espionage or foreign powers turning out the lights. The timescale of the build and the sums of money involved make for a huge gamble on what the future cost of electricity will be.
Guaranteeing an inflation-linked electricity price to EDF in a so-called contract for difference starting at 92.50 pounds per megawatt-hour -- double the current wholesale price -- locks the government in for 35 years and has the potential to look like a monumental error in the decades ahead. And the cost to U.K. consumers of the price guarantee has more than quadrupled since 2013, rising to 30 billion pounds as predictions for future electricity prices have slumped.
Here's how my colleagues at Bloomberg New Energy Finance see the outlook:
That gap between market prices and the guaranteed price to EDF might be offset by savings on the build cost. Might. EDF and its partners will shoulder any increase above the current 18 billion-pound price tag. Given that large-scale public infrastructure projects are rarely delivered on time or within budget, it seems likely that the costs will rise during the 10 years of construction. The design for Hinkley matches that of a plant EDF is currently building in Flamanville, France; that project is six years behind schedule, and costs have more than tripled to 10.5 billion euros ($11.8 billion). EDF claims that Hinkley will benefit from the on-the-job learning that experience has provided.
The U.K. lost its energy independence 12 years ago, and now relies on imports to meet almost half of its energy needs. So the decision to proceed with Hinkley in an effort to avoid brownouts in the years ahead probably makes sense.
But technology is driving down the costs of renewable energy and increasing the efficiency of everything from wind turbines to solar panels to tidal power to electricity storage. The U.K.'s bet on the cost and value of moving electrons and protons may turn out to be a costly, if somewhat unavoidable, mistake.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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