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Pressure mounts for government decision on Hinkley

09 сентября 2016
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The UK’s finance minister, Philip Hammond, has described the terms of the Hinkley Point C nuclear power plant project as a “well-designed transfer of risk”. Meanwhile British company Rolls-Royce has for the second time become a ’preferred bidder’ for the project in Somerset, and members of EDF Energy’s advisory panel have argued it is “strongly in the national interest to press ahead with the plant”.

Hinkley Point C received a long-awaited and positive final investment decision (FID) from the EDF board on 28 July, only for the UK government to postpone signing its supporting agreements. Prime Minister Theresa May is reviewing the deal and will decide this month whether to commit the government’s support.

May became the new British prime minister and leader of the Conservative Party on 13 July. She replaced David Cameron who resigned after the UK voted to leave the European Union in a referendum held on 23 June. May appointed Hammond, Cameron’s foreign secretary, as Chancellor of the Exchequer, replacing George Osborne.

Rate of return

In his first appearance before a parliamentary committee as chancellor, Hammond was asked by the House of Lords Economic Affairs Committee yesterday to justify the rate of return EDF would receive from the Hinkley project that had been agreed with the previous government.

Committee chairman Clive Hollick said: “It seems to be being financed to generate a near 10% return, which is twice the level of return that would be expected by institutional investors and the tab is being picked up over the next 35 years by the electricity consumers in this country. And in terms of transferring risk, it’s one thing to transfer risk to a corporate entity or to a partnership where you’re confident they are going to be able to deliver the goods, but there seem to be many questions hanging over whether in fact Hinkley can ever be delivered, so surely it would fail the test of being a well-designedoff-balance sheet transaction”.

In response, Hammond said, “As you know, the Prime Minister is reviewing the whole Hinkley Point project and has promised to reach a decision by the end of this month. When I referred to well-designedoff-balance sheet transactions, I was talking specifically about the transfer of risk and the financing of projects”.

”I believe that the assumed return in the EDF model is 9%, but what one has to remember is that this project as proposed delivers something that has never been delivered by a civil nuclear project anywhere in the world. It transfers the design, construction and operation risk entirely to the operator”.

“Now, there’s a very hefty insurance premium in there and that’s why the rate of return may look high. But if the project doesn’t generate electricity, it will never generate a penny of return. If it generates late, that will be a penalty suffered by the investor, the provider, not by the taxpayer or energy consumer and, indeed, the way the project is structured, there is a penalty for late delivery in the price structure. So not only do they suffer a deferred rate of return on their capital investment, they will suffer a lower price if the project is very delayed”.

”So I think it does meet the criteria for a well-designed transfer of risk in an area where risk has never been effectively transferred from the buyer to the seller before”.

Key element

Hammond was referring to a key element of the agreement between EDF Energy and the government — the contract for difference (CfD), which is a private law contract between a low-carbon electricity generator and the Low Carbon Contracts Company, which is government owned.

The generator is paid the difference between the ’strike price’ — a price for electricity reflecting the cost of investing in a particular low-carbon technology — and the ’reference price’ — a measure of the average UK market price for electricity. The CfD enables greater certainty and stability of revenues to electricity generators by reducing their exposure to volatile wholesale prices, whilst protecting consumers from paying for higher support costs when electricity prices are high.

The CfD for Hinkley Point C includes a strike price of £92.50/MWh, falling to £89.50/MWh if a FID is taken on Sizewell C. It has a payment duration of 35 years from the point at which each reactor at Hinkley becomes commercially operational or the last day of the target commissioning window for that reactor, whichever is earlier.

Hugo Robson, chief negotiator at the Department of Energy and Climate Change (DECC), told the Energy and Climate Change Committee in May that the CfD element of the contract would be cancelled if the Hinkley project is delivered eight years later than planned, in 2033. Robson confirmed there is a time-limit on a CfD in the event a low-carbon-project, whether based on renewables or nuclear power technology, is late. “From 2025–2029 they get a 35-year CfD. After 2029 the CfD is shortened by one year of delay up to 2033, after which it would be cancelled. They would be able to get revenues from the market, but not top-up revenues from the CfD,” Robson said. “If there is a very significant delay, and we’re talking about eight years, then at that point we are able to cancel the contract. As is the case for all CfDs, there is a back-stop date”, he added.

Soon after her appointment as prime minister, May scrapped DECC and folded its brief into the newly-created Business, Energy and Industrial Strategy (BEIS) department. BEIS is led by the Secretary of State for Business, Energy and Industrial Strategy, Greg Clark.

Hammond told the parliamentary committee meeting yesterday he would make his first budget statement on 23 November.

In his last Autumn Statement, on 26 November last year, Osborne said the UK will invest at least £250 million ($377 million) over the next five years in an “ambitious” nuclear research and development program. In October the same year, EDF Energy and China General Nuclear agreed a deal for the Chinese company to take a 33.5% stake in the £18 billion Hinkley project. In addition, the two companies agreed they would develop projects to build new plants at Sizewell in Suffolk and Bradwell in Essex, the latter using Chinese reactor technology. EDF’s share in the project stands at 66.5%, but the company has said it intends to offer other investors stakes in the project. However, it plans to retain at least a 50% stake itself.

Last September, Osborne announced up to £2 billion in UK government support for the Hinkley plant. The guarantee will be provided by Infrastructure UK, a unit within the Treasury, which works on the UK’s long-term infrastructure priorities and secures private sector investment. The European Commission approved the Hinkley Point C state aid case in October 2014. The £2 billion is covered by that approval.

Plea for positive decision

In a letter to the Financial Times newspaper published today, members of EDF Energy’s stakeholder advisory panel set out “the five main reasons” why they believe the prime minister should decide in favour of the Hinkley project. They also noted that the pricing arrangement of the Hinkley deal “has already been subject to lengthy and robust analysis by the Treasury”.

Firstly, the UK “needs new nuclear generating capacity to replace its ageing fleet, to provide stable supplies of low-carbon electricity for decades and to reduce the country’s reliance on imported energy”, they wrote.

Secondly, EDF Energy has an “outstanding record” as a nuclear power plant operator and the “productivity of Britain’s nuclear power generation has increased significantly under its ownership”.

Thirdly, “When it comes to value for money, we do not know what the price of electricity will be in 30 years. But we do believe today’s depressed wholesale prices are not a basis for comparison, and that the deal that has been struck for Hinkley Point C is competitive with other future generation opetions when the price of carbon is properly costed”.

Fourthly, EDF has been working closely with its Chinese partners in the Hinkley project “for many years” and they are “close to the successful completion” of two reactors at Taishan, China.

Finally, they wrote, the project will provide a “vital part” of the UK’s industrial strategy.

The letter was signed by: Richard Lambert, former director general of the Confederation of British Industry; Diane Coyle, professor of economics at the University of Manchester; Chris Patten, chancellor of Oxford University, former governor of Hong Kong and former European commissioner; Simon Robertson, former chairman of Rolls-Royce and former deputy chairman of HSBC; and Helen Alexander, chair of British events group UBM.

Companies waiting to sign contracts

Rolls-Royce announced today it has been awarded preferred bidder status for a contract to supply an integrated nuclear emergency diesel system for Hinkley Point C, comprising an MTU diesel generator made by Rolls-Royce Power Systems and Rolls-Royce patented instrumentation and control technology.

The company said this is in addition to the preferred bidder status it had already been awarded for contracts to design and manufacture a number of heat exchangers, and coolant treatment equipment for the reactor systems.

Harry Holt, president of Rolls-Royce’s nuclear business, said: “We hope very much to be able to finalise these important contracts as soon as we are able to do so, and play our part in the delivery of the UK’s first nuclear reactors in more than 20 years, which will provide reliable, low carbon electricity for future generations”.

Today’s announcement brings the total preferred bidder contracts awarded to Rolls-Royce to over £160 million for Hinkley Point C. This includes a £75 million contract awarded to a Rolls-Royce/Nuvia Partnership last year to design, procure, install and commission two systems for the treatment and waste processing of reactor coolant at the Hinkley plant.

Yesterday, Wales-based Express Reinforcements said it is to supply 200,000 tonnes of reinforcing steel to Hinkley. The company has been given preferred bidder status via the Tier 1 contractor BYLOR as part of the continuing preparatory work for the project in Somerset, England. Express is based in Neath, but also has manufacturing capability in Newport, using steel produced by CELSA Steel in Cardiff. BYLOR is a joint venture between Bouygues and Laing O’Rourke.

Andy Lodge, managing director of Express Reinforcements, said: “We are pleased to be the preferred supplier of reinforcing steel to this contract through BYLOR. It cements long-term relationships and puts Express at the forefront of reinforcing steel supply, having already been a major supplier to other key infrastructure projects such as Crossrail and Heathrow Terminal 5. It shows that our proven track record in delivering on these significant projects is highly valued and local, responsibly-sourced steel to the highest quality standards (Eco-Reinforcement/BES 6001) is fundamental to all involved on this construction”.

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