The Curse of Hinkley Point

The contract for the proposed Hinkley Point nuclear power station is so heavily loaded with penalties that the UK government is unlikely to cancel. Rising costs and other project risks, on the other hand, mean that EdF is in no hurry to build it. This results in a stagnant uncertainty that further clouds prospects for what would otherwise be the technology of choice, Combined Cycle Gas Turbines, and even for renewables.One of the UK government’s subsidiary aims in supporting EdF’s proposal to build a new nuclear power station at Hinkley, in Somerset, was, in the words of the National Audit Office's new and extremely critical appraisal, “to generate wider investor confidence and pave the way for other new nuclear projects” (p. 6). In this ambition the government has not only failed comprehensively, but already produced outcomes that are likely to be  counterproductive. With only preliminary works completed, the Hinkley project already deserves its own chapter in the record of government mishandling of nuclear energy. Indeed, if Greenpeace moles had been manipulating Departmental policy with the aim of scotching a nuclear future, they could not have been more successful.This matters, not because Hinkley C itself is essential to UK energy security – it simply isn’t and Combined Cycle Gas Turbines (CCGTs) are a much better bet in the medium term – but because nuclear energy is very likely in the far future to be the only attainable means of replacing fossil fuels and at the same time maintaining very high levels of global wealth. Nuclear fuels are extremely dense, low entropy stocks of energy, and they have the potential, so far only imperfectly realised anywhere in the world, of yielding a very high Energy Return on Energy Invested. The higher that return, the larger the rest of the non-energy sector economy, making for general prosperity. Renewable energy has no such prospects.Paradoxically, therefore, with an eye on the long term welfare of the United Kingdom, government should have cancelled the obviously misbegotten Hinkley scheme before issuing a contract. This was clear in June last year (see my blog “Hinkley C and the UK Power Market”), but unfortunately Mr Clark allowed himself to be hustled into granting a contract and, crucially, a very detailed Investor Agreement setting out terms for compensation in the event of changes of policy. The two parties, the British government on one side, and, in effect, the French government on the other, now find themselves locked into a project for which neither has any enthusiasm.What should the UK’s Secretary of State do? Thanks to the absurdly generous Investor Agreement it seems that he cannot now cancel the project, even at this early stage of construction, without paying EdF compensation for lost profit over its lifetime (the calculation is complicated, see p. 46-7). The National Audit Office estimates this compensation at £22 billion (in 2012 prices, see p. 7).Alternatively, one might think that Mr Clark and his successors could simply sit on their hands and wait for for EdF's problems at Flamanville to come to a head, for Hinkley's costs to steadily escalate and its timetable to slip, all in the hope that the French state will eventually blink. However, that is unlikely to happen. EdF is in no hurry to complete the scheme, and has generous allowances for time overruns. Furthermore, the escalating construction cost estimates (reported as an additional 3 billlion Euros, for example in The Times 27.06.17) are probably not of overwhelming concern, since Her Majesty’s Treasury is under an obligation to guarantee a £2 billion bond issue in 2018, to finance construction. With just the faintest perceptible irony, the NAO comments on this bond issue that “EdF has said it does not expect […] to use this facility” (p. 6). Perhaps EdF meant this when it was said, but in the current situation it would not be surprising if the board see things differently.Thus, neither party is likely to bail out. The British government is tied down by the contract that it foolishly granted, and even if EdF has secretly abandoned realistic expectations of ever generating electricity at Hinkley in the foreseeable future, or ever, it will probably be easier on the balance sheet to maintain the appearance of proceeding with construction. This marriage will go on, not for the sake of the children, who will be paying for this mess, but for the sake of appearances.There are two undoubted casualties from this debacle. The first I have already noted, the harm to the long term future of nuclear energy. Organic growth and refinement in this sector is highly desirable, but all over the world it has suffered from governmental mishandling. Hinkley makes this problem worse.The second casualty is the development of a new generation of Combined Cycle Gas Turbines. These are fundamentally economic, and are, in truth, the benchmark by which to measure the bad value both of Hinkley and its almost identically evil twin, the renewables programme. In an undistorted market investors would be building more modern CCGTs, with very high thermal efficiencies, low fuel consumption and low emissions. But while Hinkley remains even a vague possibility, and so long as the UK continues to pretend to adhere to the renewables targets, the future market for electricity in the United Kingdom will appear so uncertain in scale and unattractive in character that there will be little appetite for investment in CCGTs.This grim mess may yet result in a third casualty, and far from celebrating this outcome, supporters of wind and solar should be worried. The need for low cost firm generation is not yet quite acute, but will become more pressing. With the market hemmed in by the punitive Hinkley contract on one side, and commitments to EU renewables targets on the other, government will choose to clear space with least effort. This could easily mean abandoning renewables to their fate by loudly declaring them a glorious success while quietly cancelling further support and allowing nature to take its course.