Negotiations between the UK government and EDF over the price to paid for nuclear power are dragging and row has now erupted on the continent over whether nuclear power can qualify for state aid. Steve Thomas from Greenwhich University unravels the hurdles facing any deal:
It’s important not to read too much into the public posturing – but it’s clear who has the upper hand in the negotiations - EDF.
The French state owned utility has larger debts than it can comfortably sustain, it has to make big investments in its 58 French reactors to take account of the lessons from Fukushima and it has to make the decision how far to life-extend its existing plants, which begin to reach their expected lifetime in only 4 years and how far to replace them.
Neither life-extension nor replacement will be cheap. So making an investment of at least £14bn in the UK is not likely to be attractive to its owners unless the deal is extremely low risk. By contrast, the UK government has invested seven years of its time, resources and credibility in the nuclear option and to have to walk away empty handed would be hard for it to swallow.
Long contract
The strike price is clearly going to be close to £100/MWh and the earlier reports of £120-150/MWh were to prepare us for a price that is more than twice the current market price. The contract length is astonishing. When the Contract for Difference (CfD) plan was announced last summer, the life was never specified but the speculation was that for nuclear, the duration might have to be extended from the 15 years typical for renewables to 20 years.
The talk of loan guarantees is also surprising given the assumption of a 40 year contract and the Treasury will be unwilling to take on a large public liability that it does not have to. Perhaps matching loan guarantees from the French and UK governments will be acceptable to the Treasury - though guarentees from the French side seem increasingly unlikely.
Ten per cent
The requirement for a 10 per cent rate of return for what will essentially be a regulated asset is hard to square with the return on investment of only about 5 per cent that is being offered to the owners of the electricity networks for their regulated businesses. Perhaps the major issue for finance is whether the contract will allow cost overruns in construction to be recovered from consumers. If they cannot, EDF and potential financiers will see the contract as high risk.
There is also uncertainty about the signatories to the contract. The ‘counterparty body’ to be created under the Energy Bill currently working its way through Parliament and that will ultimately sign this sort of contract for the government will not be set up before the next general election. Whether some form of letter of comfort from the minister will satisfy financiers that a future government will honour this agreement remains to be seen. On the other side of the contract will actually be NNB Genco, which was an 80/20 JV between EDF and Centrica until Centrica’s withdrawal earlier this year.
There have been reports that a Chinese partner, probably Chinese Guangdong Nuclear, will step in to replace them but this is no more than speculation perhaps with a view to persuading the public the Hinkley project is one international investors are clamouring to get a piece of.
State aid
If a deal is done, there are more hurdles to jump. The first will be the European Commission and whether the contracts violate EU law on State Aid.
There is a strong lobby of Member States that is trying to amend guidelines on State Aid for energy so that nuclear power has a comparable status to that of renewables and is exempt from State Aid rules.
This would require the guidelines to be amended to be ‘technology neutral’ – as suggested in a recent leak to the German press. Draft revised guidelines will be published soon with a final text by the end of the year. If technology neutrality can be inserted, the issue of State Aid will probably not be a major problem and this is another factor leading EDF to want to delay so there is clarity on whether a major State Aid inquiry will be needed.
However other countries, notably Germany, Austria and Denmark are known to oppose the change.
The CfDs are indisputably State Aid and if guidelines are not revised in favour of nuclear they will have to be examined by the Competition Directorate of the Commission. This will require them to determine whether the agreement favours certain parties and is liable to distort competition, the tests for judging whether state aid is legal.
Given the queue of countries hoping to adopt a similar model for their nuclear programmes to that of the UK if it does not violate EU Legislation, there are strong arguments this is not a decision the Commission should take without a very detailed and comprehensive review.
The Commission will also have to review the Electricity Market Reforms (EMR) that lie behind the Energy Bill. These appear to be in significant contravention with the Commission’s third Electricity Package that mandates electricity markets and while the Commission might be behind the UK’s efforts to order new nuclear plants, it will find EMR, which effectively replaces market driven decision making with central planning as very hard to swallow. Commissioner Oettinger described EMR as ‘Soviet’.
Delay for approval
So there is a strong possibility that even if a deal can be struck, it will be 2-3 years more before it can be approved. EDF will then have to review the terms and if costs or the cost of finance have changed, try to renegotiate them. It will also have to secure the finance. If the project can pass all these tests and the EPR is still a viable technology – if some good experience with it does not emerge soon, this must be in doubt - construction might then begin.
But the process will have been so long and tortuous that perhaps only one reactor will be built and successors quietly forgotten. Those with long memories will have a sense of déjà vu. They will remember Margaret Thatcher coming to power and announcing a programme of 10 reactor orders, the first to be placed in 1981 followed by one a year for the next decade. This resulted in just one order being placed (Sizewell B) which did not come on-line till 1995. It cost more than £3bn in money of the day and just a year after it was completed, the only way to privatise it was to effectively give it away.
Clearly powerful political backing is not enough to get nuclear power ordering going if techno-economic factors are against it but political hubris demands that at least one plant will be built.
