The Government are deceiving us about the effectiveness of their new funding mechanism for nuclear power
Consumers face a double whammy of bills to pay for the planned nuclear power plant, Sizewell C, due to be given a go-ahead soon. According to a ‘worst case scenario,’ consumers are likely to (collectively) pay around £34 billion in today’s prices before any electricity is generated from Sizewell C at all. But, in addition, according to my calculations, under this (quite likely) worst-case scenario consumers will then also pay around £160 per MWh in today’s prices for electricity produced by Sizewell C. This works out as £117 per MWh in 2012 prices (ie the base year for setting the cost of Hinkley C). The Government appears to be doing little or nothing to prevent this scenario from occurring.
Hence consumers could not only be paying much more per MWh than the controversially high Hinkley C deal (£92.5 per MWh in 2012 prices) but will also be paying large sums upfront before a kWh is even generated. In fact, despite being labeled as a ‘worst case scenario’, the estimate for Sizewell C costs that have been calculated is essentially based on the type of cost overrun experienced by attempts to build nuclear power plants in the West since 1990. That is nuclear construction costs end up being around double the amount initially budgeted.
I have taken the size of the upfront costs payable by consumers from an analysis done by Professor Stephen Thomas of Greenwich University. See also here. I have then taken his worst-case scenario figure for these upfront costs and converted them into a figure for costs per MWh by applying conventional economic tools. This involves using discounted cash flow analysis using a (real) 6 percent discount rate and assuming Sizewell C will be generating at an average of 90 percent of full capacity. This assumes using a contract type paying premium prices for energy generated similar to that used for Hinkley C (ie lasting for 35 years). I have based cost estimates of operating nuclear power plants on US experience, although operating costs form only a small element of the costs. The large bulk of the costs are concerned with repaying money loaned and invested in the power station.
NB Although I have used Professor Thomas’s figures for construction costs in his ‘worst case scenario’, the figures for final contract prices for paying for Sizewell C are my calculations alone.
My analysis runs contrary to the narrative spread by the Government. They claim that the so-called Regulated Asset Base (RAB) mechanism for funding new nuclear power plants will make nuclear power cheaper for the consumer. On the contrary, it is likely to allow more to be paid to EDF for Sizewell C compared to Hinkley C. This is because consumers will be responsible for paying cost overruns for Sizewell C whilst in the case of Hinkley C it is EDF that takes responsibility for cost overruns. The total amounts that consumers will have to pay will remain unknown until it is far too late to do anything to stop consumers from having their electricity bills dramatically increased.
‘Under the new RAB scheme, private investors receive greater certainty through a lower and more reliable rate of return in the early stages of a project, lowering the cost of financing it, and ultimately helping reduce consumer electricity bills.
Overall consumers are expected to save more than £30 billion over the project’s lifetime on each new large-scale nuclear power station compared with existing funding mechanisms.’
The RAB mechanism has been lauded as a cost-saver because it allows EDF to pay lower interest rates on money borrowed to finance construction compared to the borrowing costs applicable to building Hinkley C. Money needed to finance interest payments and investors during the construction period is charged to consumers whilst the plant is being built.
There’s one giant flaw in this argument. The Government seems to be heading towards giving the go-ahead to EDF to start construction without agreeing a price to be paid for electricity. This means that consumers will pay for whatever it costs to build the plant. The costs of nuclear power stations seem always to be a lot more than what was estimated at the time of the ‘final investment decision’ (FID).
This is different from what happened with Hinkley C. In the case of Hinkley C EDF was committed to paying for any cost overruns themselves without being paid any extra money. In fact, Hinkley C is already around 50% over budget compared to the estimates made at the time of the FID, and many of us would expect a lot more cost overruns to come in the future! But EDF bears responsibility for these cost overruns – in effect the French taxpayers will pay since EDF is owned by the French Government.
Yet under the RAB mechanism, it seems that EDF will be paid for what they actually spend. This time it will be British, not French taxpayers and consumers, that will be paying for the cost overruns. OFGEM is being given responsibility for organising payments to EDF.
Ultimately, it seems, OFGEM will be the ‘fall guy’ when, many years down the line, there is public controversy over the costs of the power from Sizewell C. In an obscure piece of wording in an obscure document entitled ‘Revenue Stream for the nuclear RAB model’, the government says (page 12) ‘The amount a relevant licensee nuclear company is allowed to receive (‘allowed revenue’) in respect of its activities relating to the design, construction, commissioning, and operation of the relevant nuclear project would be determined by Ofgem’.
In other words, EDF will have virtually a blank cheque to pay all their costs. The only control OFGEM will have is to check that the costs have actually been spent or will be spent on the power plant.
People were surprised at the cost of the Hinkley C contract, but the surprise was based on the public being kept in ignorance of nuclear construction costs in the past. Now the Government has learned its lesson, and we shall see a return to the past practice of the public being kept in the dark about the costs of building nuclear power plants.
In fact, the Government themselves recognised in an impact assessment that ‘On average, the construction cost of a nuclear power plant is around’…… ‘100% higher than expected at the point of FID based on data from all nuclear power plants built after 1990’ (pages 10-11). The Government impact assessment also says that repeated versions of the same model of nuclear power plant have much lower cost overruns. However, there is no evidence this is happening in the case of the European Pressurised Reactor that is to be built at Sizewell C. Reactors of this type that have been built in Finland, France, and now ongoing in the UK are all greatly over budget. Only the reasons given for the cost overruns seem to be different in the different cases.
Of course, the Government could ensure the consumer against the ‘worst case’ (read quite likely!) scenario discussed here. They could do this by negotiating a contract with EDF for payments to cover the construction costs in advance of giving the go-ahead for the project. However, there is no evidence that the Government is trying to do this. It may well be that in the case of Sizewell C the French Government will insist that the British taxpayers and energy consumers should pay the cost of cost overruns, not French consumers as in the case of Hinkley C.
by David Toke