On the eve of the expected Government go-ahead for construction of the nuclear power plant at Hinkley Point C, it is worth reflecting on what it implies for consumers’ energy bills in the future and whether it is value for money.
Nuclear power is to be financially supported via a Contract for Difference (CfD) which is a price guaranteed for a fixed period (a so-called strike price). If the market price of electricity is below the strike price, then the utility receives a top-up from consumers. However, if the market price exceeds the strike price, the difference could be passed on to the consumer.
How high or low the strike price is fundamental to how much the customer pays in total and whether the customer gets ‘value for money’ relative to other uses of that money – energy efficiency or renewable energy for example. This is recognised in DECC’s Draft Operational Framework for the CfD, which states that “Ministers will ultimately take a decision on whether those strike prices are value for money and affordable and determine whether or not to award the CfD in light of that analysis”.
Although DECC have refused to comment, the press have suggested that the strike price for nuclear power will be in the order of £100/MWh, that it will be fixed for forty years and that EdF is looking for a 10% rate of return on its investment.
This suggested strike price is approximately double the current market price for electricity. Furthermore the draft framework for operation of the CfD notes that the that strike price is agreed for the duration ”barring any adjustments that are provided for within the CfD, such as inflation indexation or change in law” and therefore any announced strike price may well not be the final guaranteed amount – there’s huge potential for adjustment, both downwards, and more importantly upwards. The devil will be in the details of the CfD, and at the Minister’s discretion.
Meanwhile, the cost of electricity from a similar reactor in France is expected to be €74/MWh (around £65/MWh). In addition, the National Audit Office, in its briefing for the House of Commons Energy and Climate Change Select Committee quoted 2011 revisions to DECC’s levelised costs of nuclear power as being £74/MWh. So not only is the strike price double the current market price for electricity, it is also significantly above the estimated cost of electricity from the same reactor in France, and 25% above DECC’s original cost estimate for power. Hardly value for money for consumers.
One reason for such a high strike price may be that EdF is reportedly demanding a 10% rate of return on its investment. By way of contrast, it is interesting to compare this with DECC’s views of the rate of return guaranteed under the Feed In Tariff (FiT) for small scale solar PV. When DECC was challenged over the reduction in the FiT it stated, “we continue to consider that a significantly lower tariff is needed to provide generators with a rate of return of 4.5% to 5% for well located installations. We are not persuaded that a higher rate of return would be reasonable given the focus of the FiTs scheme ... and given the current investment climate .” So while the Government deems 4.5-5% adequate for a renewable source, it looks happy to grant around 10% for nuclear power.
The longevity of the proposed nuclear CfD is also significant. It will guarantee nuclear power a fixed price for a suggested 40 years, excluding inflationary indexing until 2060! This is double the commitment for renewable energy sources, which are expected to receive guarantees for 20 years. This is important both in relation to the total potential additional cost to energy users but also due to the changing costs of the alternatives over such a long period of time. The cost of manufacturing and deploying renewable energy sources at scale is falling, and in the solar sector panels rapidly, having fallen by 80% in the last three years and wind power is now around a quarter of what it was two decades ago. These declines are leading to lower and lower FiTs for renewables across the world each year.
Costs for other renewable sources are expected to fall too. The Crown Estate estimate that the current cost of offshore-wind is £140/MWh, but under three of their four scenarios it is expected to fall to £100/MWh or below by 2020, with costs continuing to fall after that. In Germany, the FiT for large scale solar PV decreased from €0.45/kWh in 2004 to €0.25/kWh in 2010, and that’s with guaranteed support for only 15 years compared to the 40 years demanded by EdF. The level of support for PV is continuing to fall, but e if the price regression slows in subsequent years, large scale solar support schemes will be cheaper than the suggested UK nuclear strike price in the early 2020s, the earliest at which the first reactor could come on stream. Given the expected cost of nuclear build and the electricity price guarantee being demanded, this proposed nuclear deal would fail any fair value for money assessment.
What is particularly alarming about the nuclear deal, is even if it is completed to time and budget (which has not occurred with similar projects in Finland and France where total costs have more than doubled), it will lock in a generation of electricity consumers to higher energy bills for decades into the future, while once again treating newer, cleaner renewable technologies as the poor relation in the electricity market.
