Hinkley Point: the dreadful deal behind the worlds most expensive power plant

0
21

The long read: Building Britains first new nuclear reactor since 1995 will cost twice as much as the 2012 Olympics and by the time it is finished, nuclear power could be a thing of the past. How could the government strike such a bad deal?

Hinkley Point, on the Somerset coast, is the biggest building site in Europe. Here, on 430 acres of muddy fields scattered with towering cranes and bright yellow diggers, the first new nuclear power station in the UK since 1995 is slowly taking shape. When it is finally completed, Hinkley Point C will be the most expensive power station in the world. But to reach that stage, it will need to overcome an extraordinary tangle of financial, political and technical difficulties. The project was first proposed almost four decades ago, and its progress has been glacial, having faced relentless opposition from politicians, academics and economists every step of the way.

Some critics of the project have questioned whether Hinkley Point Cs nuclear reactor will even work. It is a new and controversial design, which has been dogged by construction problems and has yet to start functioning anywhere in the world. Some experts believe it could actually prove impossible to build. Its three times over cost and three times over time where its been built in Finland and France, says Paul Dorfman, from the UCL Energy Institute. This is a failed and failing reactor.

Others have pointed to the cost. At present, the estimated total bill for Hinkley Point C is 20.3bn, more than twice the London Olympics. To pay for it, the British government has entered into a complex financial agreement with lectricit de France (EDF), the energy giant that is 83% owned by the French government, and China General Nuclear Power Group (CGN), a state-run Chinese energy company. Under this contract, British electricity consumers will pay billions over a 35-year period. According to Grard Magnin, a former EDF director, the French company sees Hinkley as a way to make the British fund the renaissance of nuclear in France. He added: We cannot be sure that in 2060 or 2065, British pensioners, who are currently at school, will not still be paying for the advancement of the nuclear industry in France.

Many British observers agree that the deal is ludicrously favourable to EDF a dreadful deal, laughable says Prof Steve Thomas, who works on energy policy at the University of Greenwich. But even insiders at EDF arent entirely happy with it. In the months before the EDF board finally signed off the deal in autumn 2016, the finance director resigned, along with Magnin. The Hinkley Point project remains very risky, Magnin told me. He is particularly concerned about EDFs ability to complete the project before the current deadline of 2025. Why have we reached this point? asked Magnin. It is the construction of a house of cards.

Not everyone has lost faith in the project. When John Hutton was business secretary in 2008, he announced that the government would encourage the safe and affordable development of nuclear reactors. Back then, he insisted the plants would be completed well before 2020, and wouldnt receive a penny in subsidies from the British government. Today, despite those earlier promises having been broken, Hutton still lobbies for nuclear: Were not just creating power stations, he told me. We are making history.

But the irony of Hinkley Point C is that by the time it eventually starts working, it may have become obsolete. Nuclear power is facing existential problems around the world, as the cost of renewable energies fall and their popularity grows. The maths doesnt work, says Tom Burke, former environmental policy adviser to BP and visiting professor at both Imperial and University Colleges. Nuclear simply doesnt make sense any more.

The story of Hinkley Point C is that of a chain of decisions, taken by dozens of people over almost four decades, which might have made sense in isolation, but today result in an almost unfathomable scramble of policies and ambitions. Promises have been made and broken, policies have been adopted then dropped then adopted again. The one thing that has been consistent is the projected cost, which has rocketed ever upwards. But if so many people have come to believe that Hinkley Point C is fundamentally flawed, the question remains: how did we get to this point, where billions of pounds have been sunk into a project that seems less and less appealing with every year that passes?


After winning the 1987 election, Margaret Thatchers government launched plans to privatise the entire electricity market. But in the months following this announcement, it became clear that selling off Britains three dozen nuclear units was going to pose a problem. A former civil servant closely involved with the privatisation remembered the shock of discovering the sheer scale of the risks and costs associated with the creaking first generation of nuclear plants. Whereas government policy papers could massage figures and make optimistic projections, the prospectus, which provided financial information for potential investors, could not bend the truth. A government paper was one thing, said the former civil servant, but if the figures were misleading in the prospectus, it was a criminal offence. That was not at all like a government paper, to be honest. It was quite a moment for us all.

The
The control room at Hinkley Point A power station, which opened in 1965. Photograph: Matt Cardy/Getty Images

By 1989, it was clear that Britains nuclear sector would not be privatised companies had little desire to take on the immense financial and practical risks. The decommissioning costs are unbelievable, the former energy secretary Chris Huhne told me. In the 50s and 60s, they built them as if they were the pharaohs building the pyramids. It was: Were never going to have to take them apart.

In 1990, as the privatisation of the electricity market went ahead, Britains nuclear power stations moved into a state-owned company. By then, the government was already deep into the construction of Sizewell B nuclear power station, on the Suffolk coastline. Hinkley Point C was next on the list.

Six years later, the older generation of nuclear power stations were transferred into another state-owned company, while a new private company called British Energy stepped forward to take over the eight most modern nuclear power plants in the UK. As British Energy took over its ready-built assets, it announced it would let the planning consent for Hinkley Point C lapse. Taking over existing nuclear power stations made financial sense; taking on the eyewatering costs of building new ones did not. The current nuclear power stations would run until the end of their projected lifespans, and then something else would have to close the gap.

But soon after its privatisation in 1996, British Energy began to run into financial problems. By 2002, the new private company was in chaos, ultimately needing a 3bn bailout from the government. If the notion of too big to fail was to become a feature of Britains banking industry, it was already baked into its nuclear business.


During Tony Blairs second term as prime minister, the Cabinet Office was tasked with reviewing the UK energy industry. When it delivered its report in February 2002, the message was clear: the cost and risk of building new nuclear power plants should be left to the private sector. It said that although nuclear shouldnt be ignored, it was at present economically out of the question, says Gordon MacKerron, professor of science and technology policy at the University of Sussex, who was an adviser on the review.

By the end of 2003, all government policy indicated that Hinkley Point C would never be built, and there was no prospect of any other new nuclear power plants. It seemed certain that nuclear had no future in Britain which is why, when the government performed a volte-face three years later, so many onlookers were astonished. Without any obvious change in the world, by 2006, the position in government had been completely reversed, MacKerron told me. Nuclear power had become extremely beneficial, important and not uneconomic.

One thing that had happened in the intervening years was a PR blitz by the nuclear industry, which had deployed scores of lobbyists, including former politicians such as the former energy minister Brian Wilson, to push the idea of a nuclear renaissance in the UK. Between 2003 and 2006, says Andrew Stirling, professor of science and technology policy at Sussex University, Britain saw the beginnings of a massive pro-nuclear lobbying and PR campaign that continues to this day.

Through the media and advertising campaigns, key messages were hammered home. Renewables were intermittent and unreliable. Overseas gas imports were politically vulnerable. Green nuclear was the only plausible way to hit carbon dioxide reduction targets. Keith Parker, who was then chief executive of the Nuclear Industry Association (NIA), told the New Statesman that the 2005 election became a particular focus for swaying opinions. It gave us a good chance to raise the profile of nuclear power, he said. In the months leading up to the election, a series of talks was organised at exclusive venues such as the Army & Navy Club on Pall Mall and St Stephens Club in Queen Annes Gate. Industry leaders and experts came together to explain the benefits of nuclear to politicians and energy journalists. The NIA (which is now chaired by John Hutton) took on the role of managing the influential all-party parliamentary group an informal grouping of politicians on nuclear energy.

In July 2006, the government U-turn arrived in the form of a new policy paper, The Energy Challenge, which declared that new nuclear power stations would be necessary to help Britain reduce its carbon emissions and to ensure an uninterrupted, affordable supply of energy well into the future.

Greenpeace launched a legal challenge, claiming that the consultation process behind the governments recommendation had been totally inadequate. The judge presiding over the case agreed, and in February 2007 ruled that the process had been misleading, very seriously flawed and procedurally unfair. Blair accepted the ruling, but stated that this wont affect the policy at all.

Andrew Stirling believes that there was a crucial, largely unspoken, reason for the governments rediscovered passion for nuclear: without a civil nuclear industry, a nation cannot sustain military nuclear capabilities. In other words, no new nuclear power plants would spell the end of Trident. The only countries in the world that are currently looking at large-scale civil power newbuild programmes are countries that have nuclear submarines, or have an expressed aim of acquiring them, Stirling told me.

Building nuclear submarines is a ferociously complicated business. It requires the kind of institutional memory and technical expertise that can easily disappear without practice. This, in theory, is where the civil nuclear industry comes in. If new nuclear power plants are being built, then the skills and capacity required by the military will be maintained. It looks to be the case that the government is knowingly engineering an environment in which electricity consumers cross-subsidise this branch of military security, Stirling told me.

In May 2007, the government published a paper titled Meeting the energy challenge: a White Paper on energy, which reaffirmed its enthusiasm for nuclear and declared that there had been significant changes in the economics of nuclear power. In contrast to the late 1980s, the government claimed it was now being approached by some energy companies expressing a strong interest in investing in new nuclear power stations.

The
The Quantock hills in Somerset, looking towards the site of Hinkley Point. Photograph: Deeplyvibed/Alamy Stock Photo

When Gordon Brown took over from Blair in June 2007, the shift to nuclear proceeded apace. As it happened, the new prime ministers brother, Andrew, was then the communications director for EDF, though a spokesman for Gordon Brown told me that at no point while he was prime minister did he ever discuss energy policy with Andrew Brown.

In January 2008, the announcement came. A new generation of nuclear power stations in the UK was given formal backing by the government. It was one of the most exciting days in my ministerial life, says Hutton. Ministers do lots of important things all the time, but there are probably those moments in your ministerial career when you sit back and think: Actually, this is going to have an intergenerational effect. This is going to affect the country 50, 60, 70 years after Ive gone.

The development at the top of the list was Hinkley Point C.


Just as it looked like Hinkley Point C would go ahead, the banking crisis erupted. The crash pretty well changed everything, Hutton told me. The private companies, such as E.ON and Centrica, which had previously expressed interest in funding the new nuclear power plants, pulled out. If the UK government wanted to go ahead, it would have to pay for the power plants itself. This was a complete departure from its previous insistence that the private sector would shoulder both the development costs and risk. It was agreed on one basis, and then they moved to another, says Molly Scott Cato, the Green MEP for the south-west of England.

Despite the financial chaos, the government was still determined to make Hinkley work. There had to be a different route found, Hutton said. The key piece of the jigsaw was British Energy. The company, which had been pulled back from near-collapse by the government in 2002, owned many of the best sites for building new nuclear power stations. If the government wanted private companies to build nuclear power stations, it would have to sell British Energy to one of the companies.

Various purchasers were considered for British Energy in 2008, with EDF the keenest. At one point, we tried to get Centrica and British Energy to work together, said a former senior civil servant. But the department very quickly realised it would be like two drunks leaning together for support. EDF was the best bet. With no real plan B after the private sector had lost interest in Hinkley Point, the government suddenly found itself in a weak negotiating position. They perhaps didnt foresee that only one developer, EDF, was prepared to go ahead, said MacKerron. So by definition, they were a bit over a barrel.

In September 2008, British Energy was sold to EDF. After months of long and difficult negotiations between EDF and a team of civil servants representing the UKs interests in British Energy, and an earlier failed bid, the French company paid 12.5bn to take over eight UK nuclear power plants. It also announced its plan to develop four new power stations.

These days, EDF looks like an unlikely white knight. The market value of the company has collapsed, from more than 150bn (132bn) in 2008 to roughly 30bn (26bn) today, and the French nuclear industry is facing an existential crisis. Because many of the 58 nuclear reactors in France were built in the 1970s, they are now reaching the end of their lifespan simultaneously. Not only is Frances nuclear industry facing the costs of decommissioning, which were grossly underestimated, but almost no new nuclear power stations are being built. At present, nuclear energy provides about 75% of Frances electricity, so the potential for a disastrous energy shortfall is growing by the day.

To make matters worse, EDFs attempt to build its first new nuclear power station for years has turned into an embarrassment. Flamanville, on Frances northern coast, has been beset by overruns since construction started in 2007. It is currently projected to cost 10.5bn (9.2bn) a steal compared to Hinkley, but still three times its original budget. The Flamanville reactor is a new European pressurised reactor (EPR), the same troublesome design that is planned for Hinkley.

Magnin, the director who resigned from the board of EDF last year, told me that the company sees Hinkley Point as critical to proving that nuclear and EDF are still a reality for the 21st century. He added: If it works, it could be good business. But there is a risk that it wont work, and then everyone loses.


The financial deal that EDF struck with the British in October 2013 to fund the project which, in Magnins words, amounts to the British taxpayer funding Frances energy needs remains one of the most controversial elements of the Hinkley deal.

Given its commitment to building Hinkley Point C, the government had no choice but to make EDF an offer that was too good to resist. It offered to guarantee EDF a fixed price for each unit of energy produced at Hinkley for its first 35 years of operation. In 2012, the guaranteed price known as the strike price was set at 92.50 per megawatt hour (MWh), which would then rise with inflation. (One MWh is roughly equivalent to the electricity used by around 330 homes in one hour.)

This means that if the wholesale price of electricity across the country falls below 92.50, EDF will receive an extra payment from the consumer as a top-up to fill the gap. This will be added to electricity bills around the country even if you arent receiving electricity from Hinkley Point C, you will still be making a payment to EDF. The current wholesale price is around 40 per MWh. If there had been no inflation since 2012, the consumer would be paying an EDF tax of around 52.50 per MWh produced at Hinkley. However, because it is linked to inflation, the strike price has already risen since 2012. (The price will be reduced by 3 if EDF develops another new reactor in Sizewell in Suffolk, as it is planning to do.)

A
A concrete batching plant at the Hinkley Point C building site, September 2016. Photograph: Bloomberg via Getty Images

In short, instead of using taxpayers money to fund a state subsidy for EDF, the government negotiated a deal whereby the electricity consumer foots the bill. Given that almost every taxpayer in the UK is an electricity consumer, the distinction is largely academic. Furthermore, people in a lower tax bracket often use a similar amount of electricity to higher earners, effectively creating a regressive tax. The strike price was set when power prices were very high. They signed the contract when there was a bubble, Juan Rodriguez, an analyst at equity research firm AlphaValue, told me. Its a brilliant deal for EDF. (By contrast, the Department for Business, Energy and Industrial Strategy maintains that the government negotiated a competitive deal. A spokesperson from EDF told me: The UK Government agrees that Hinkley will provide value for money for consumers and that the overall costs of the electricity system are lower with nuclear as part of the mix than without it.)

The deal looks particularly bad when compared with the current cost of renewable energy. As Hinkleys pricetag keeps rising, the cost of energy keeps falling. And, as a recent report from the public accounts committee pointed out, although energy costs are falling, this just drives up the top-up payment to EDF. No one was protecting the interests of energy consumers in doing the deal, the report noted.


In December 2013, the European commission decided that the payments to EDF were so big that they could distort the electricity price across the whole of Europe, and launched an investigation into the deal. The resulting document, published in 2014, can be read as a 33,000-word attempt by the EU to save the UK from its own poor negotiating.

The commission raised several issues. First, it stated that the payout to EDF would give the company a huge and unjustifiable advantage over its competitors. The strike price agreement was designed to entirely eliminate market risks from the commercial activity of electricity generation.

Second, it noted that EDF has been meticulous in passing on as much risk as possible to the British government. The contract included a state guarantee for any debt that EDF required from the financial markets to fund construction of the plant. Separately, if a nuclear catastrophe hits Hinkley, EDF is also protected. Were insuring it, so if there is a disaster, it comes back to the public, says Molly Scott Cato, the MEP. Nuclear never has and cannot exist in a private market setting.

One of the most serious concerns in the EUs assessment was over the calculations for the gap between the wholesale energy price and the strike price. That gap is currently around 50. Once Hinkley starts operating, the European Commission pointed out, EDFs market share will be so substantial that it could have the ability to manipulate the wholesale electricity market. Depending on the how the strike price is calculated, there might be an incentive, the commission noted, for EDF to behave strategically to influence the reference price. For instance, if EDF abruptly sold a lot of electricity on to the market at a pre-planned time, the wholesale price could drop substantially. The lower the wholesale price, the bigger the difference from the fixed strike price, and therefore the higher the EDF tax paid by consumers. As the commission put it, there remained a question over how a vertically integrated operator might react to such an incentive framework. EDF will have a duty to its shareholders to maximise its profits. But as the commission makes clear, at the same time, the company will have the capacity to move the wholesale electricity market at certain precise times, in a way that could benefit shareholders substantially.

EDF declined to comment on this point. A spokesman for the Department for Business, Innovation and Skills said that the energy regulator, Ofgem, would be responsible for oversight of the wholesale electricity market. They have a variety of investigatory and enforcement powers at their disposal for the detection and prevention of price manipulation by market participants, said a spokesperson.

Read more: https://www.theguardian.com/news/2017/dec/21/hinkley-point-c-dreadful-deal-behind-worlds-most-expensive-power-plant