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An uncertain gateway for new nuclear

UK Nuclear Analysis: Hinkley Point C

By Ross McCracken in London

September 19, 2016 - Is Hinkley Point C the gateway to a new generation of UK nuclear reactors? If it proceeds, it points to a future UK generation mix heavily reliant on fixed-cost generation and provides a bleak outlook for gas-fired operators, CCS and new forms of renewables like tidal power.

But it could still prove an expensive white-elephant that ends rather than rejuvenates the UK’s nuclear future. Given the problems with existing EPR builds, EDF has to prove that it can deliver an EPR on time and on budget.

The UK government approved construction of the controversial Hinkley Point C nuclear plant September 15, following an unexpected review implemented from July 28, but with new conditions that apply to Hinkley Point and to all subsequent nuclear developments.

The conditions effectively create additional safeguards against the sale of stakes in the projects without government approval, and, in the case of nuclear projects after Hinkley Point, allow for a special government share in each project.

Analysis continues below...

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A government statement said: "there will be reforms to the government’s approach to the ownership and control of critical infrastructure to ensure that the full implications of foreign ownership are scrutinized for the purposes of national security.”

Although framed as an umbrella approach that would be applied equally to all foreign investment in the UK, the genesis of the new framework clearly lies in security concerns over Chinese involvement in UK nuclear projects.

However, the new conditions do not change the commercial terms of state support for the project and appear to have been accepted by both majority owner, state-owned French power company EDF (66.5%) and minority investor, state-owned China General Nuclear Power Corporation (CGN) (33.5%).

Both companies expressed “delight” at the government’s decision and have said that Hinkley Point C can now start construction.

The project will be the first new nuclear power plant built in the UK for close to 30 years, following the start of operations at the Sizewell-B PWR in 1995. It is thus a significant gamble on the readiness of the UK nuclear supply chain. It will comprise two European Pressurized Reactors (EPRs) with a combined capacity of 2,700 MW.

The cost, which has risen steadily before construction has even begun, is currently estimated at £18 billion ($23.88 billion).

EDF’s most recent timeline for the project calls for the plant’s first reactor to come online sometime during 2025, with first nuclear concrete poured for the first reactor in mid-2019.

The project will be built adjacent to existing advanced gas-cooled units on the site that are owned and operated by EDF Energy, the UK subsidiary of EDF.

Nuclear gateway

CGN has been prepared to invest in Hinkley Point C and a further plant at Sizewell on the basis that these investments would lead to permission for it to build its own plant at Bradwell, which would require UK certification of a Chinese reactor design.

Construction of a Chinese reactor in the UK would provide CGN with a track record in Europe and access to wider international markets for nuclear power.

For EDF, Hinkley Point keeps its EPR order book alive. It has notably failed to convince investors internationally that the new technology represents a good deal, losing out in competitions to other nuclear constructors offering alternative reactor designs. The Hinkley Point C deal is thus crucial for the EPR’s future, despite the financial risk it places on the company.

Construction cost risk rests solely with EDF and CGN, but Hinkley Point will be paid for through a 35-year Contract for Difference that guarantees the owners a fixed power price. If the CFD reference price, based on forward contracts in the UK wholesale electricity market, is below the guaranteed strike price over the period of the contract, the generator is compensated through a levy on consumer bills. If the wholesale price exceeds the strike price, the generator would reimburse consumers.

The strike price for Hinkley Point C has been set at £92.50/MWh ($121.79/MWh), but would fall to £89.50/MWh if EDF Energy also successfully completes construction of the proposed Sizewell C plant. These are 2012 prices, fully indexed to consumer price inflation and more than twice the level of current UK wholesale prices.

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