Skip Navigation LinksHome|News & Analysis|News Features|News Feature Detail


Financial risk

UK Nuclear Analysis: Hinkley Point C

Of the four EPRs currently in construction, all are behind schedule. The first to start construction was Finland’s Olkiluoto, which is nine years behind schedule and has cost three times as much as initially estimated. Olkiluoto is being built by French nuclear company Areva on a turnkey basis and the cost overruns have effectively broken the company, forcing EDF into a takeover to protect France’s nuclear supply chain.

Flamanville-3, which is being built by EDF, is faring little better; behind schedule, hugely over cost and dogged by concerns over the quality of key components. The two EPRs in China are also behind schedule, and therefore presumably over budget.

EDF already faces maintenance and upgrade expenditures on its new and existing fleet of reactors in France, which are forecast to reach €51 billion ($57.4 billion) over 2014-2025 at a time when both UK and French wholesale electricity prices are low and falling.

The resignation in March of Thomas Piquemal, EDF’s then chief financial officer, was widely attributed to his concerns over the risk of the Hinkley point project to EDF’s balance sheet. French nuclear unions have also expressed their opposition to the project, while UK union GMB is highly supportive.

Analysis continues below...

Request a complimentary issue of: Energy Economist Energy Economist
Energy Economist

Every month Energy Economist combines incisive judgments and detailed data sets that deliver ideas you can profit by. It includes coverage of:

  • Political and economic risk
  • Supply and demand
  • Policy and regulation
  • Liberalization and market design
  • Supply security
Request Free Issue Request More Information

In a research update published in May, ratings agency S&P said: “We believe that a decision to go ahead on the Hinkley Point C nuclear newbuild would likely lead to a one-notch rating downgrade given the embedded high execution risks and significant investment needs.”

Crowded out

Consumer organizations have expressed concern over the cost of Hinkley Point C and the high guaranteed price for the electricity it might generate, while renewables groups see the high level of state support for the project and the possibility of more reactors being built as detracting from investment in clean technologies.

Tidal lagoon project developers, which could also provide reliable baseload generation, in particular, are likely to be dismayed by the approval.

Construction also has implications for gas-fired plant generators, which will have to compete in future with heavily-subsidized nuclear power. The two-unit Hinkley Point C facility is expected to provide about 7% of the UK's electricity after it becomes operational in the mid-2020s.

Given also expected growth in wind power, particularly offshore, and solar, the construction of new nuclear means the UK generation mix will be dominated by subsidized, fixed-cost generation sources, leaving less room for gas-fired generation and less space for competitive wholesale markets overall.

Two scenarios

In a study published in September, analysts at Bernstein concluded that rapid decarbonization of UK electricity generation was possible without new nuclear, but that for total decarbonization by 2050 either Carbon Capture and Storage or new nuclear would be necessary beyond 2035.

However, this would mean that the UK could afford to delay new nuclear construction until the EPR gains a proven track record for construction and operation.

Bernstein scenarios 2035 -- UK generation mix of generation output

Bernstein paints two scenarios; in both coal-fired generation is eradicated in line with the government’s zero coal ambitions. The bank’s baseline scenario includes new nuclear, assuming 9.4 GW of new build, representing 50% of the current project pipeline.

Bernstein sees wind capacity rising by 1 GW a year and solar by 750 MW a year, so that the UK has 53 GW of wind and 24 GW solar installed by 2035. In addition to coal, the big loser is gas, which sees 15 GW of retirements through to 2030 only partially replaced by 11.2 GW of new gas-fired capacity between 2021-2035.

Bernstein’s alternate case sees no new nuclear. Instead, 21 GW of gas-fired generation is built to compensate for the closure of existing gas and nuclear plant. However, the heavier use of natural gas in power generation would require the development of CCS to achieve the government’s decarbonization targets out to 2050.

UK electricity generation

The Hinkley point decision clearly shifts the UK toward Bernstein’s baseline scenario, in which gas accounts for 12.0% of electricity generation in 2035, as opposed to a non-nuclear future, in which it accounts for 27.1%.

In the baseline scenario, Bernstein sees nuclear itself setting the system marginal wholesale power price in 2035 for 30% of the time and gas 55.4%, as oppose to gas setting the marginal price in the alternate scenario 83% of the time and remaining nuclear 2.9%.

The base case is a scenario in which fixed-cost generation dominates, as oppose to variable costs in the alternate case.

Bernstein sees wholesale electricity prices being higher in the alternate case at around £40/MWh and falling below £30/MWh in the base case.

However, this says little about the overall cost to consumers because the non-wholesale cost of electricity generation in a high fixed-cost generation mix will be more significant. In Bernstein’s scenario, the UK would be subsidizing Hinkley Point C at a rate of £57/MWh plus inflation under the CFD agreement.

The inflexibility of a system based on the dominance of fixed-cost generation sources is also a cause for concern. Bernstein’s calculations suggest that in its base case, renewables output will exceed demand 6% of the time and, in 25% of these periods, nuclear generation would have to ramp down. If it can’t, owing to its high start-up costs, or the incentive provided by CFDs, renewable generation would either have to be stored or curtailed.

Next page: CCS option

Copyright © 2018 S&P Global Platts, a division of S&P Global. All rights reserved.