Will EDF get an inflation-proofed deal? Renewable generators are watching!

Will EDF get an inflation proofed deal for subsidies for Hinkley C? Renewable energy generators will be watching this closely.

The EDF public relations team continues to pump out a lot of hopeful press briefings about prospects for Hinkley C. Stories appear in newspapers from unattributed sources about how a deal acceptable to EDF is about to be brokered with the Government. In fact such a deal seems to be highly unlikely, or at least one that meets EDF's demands for close to a 40 year contract, close to £100 per MWh guaranteed payments and, crucially, underwriting of construction costs (the blank cheque option). Nevertheless the publicity machine roles on in an effort to preserve the jobs of people most associated with the notion of new nuclear construction for as long as possible. It is a bit like the story of neanderthals clinging on to life in obscure corners of Europe, although that may do an injustice to neanderthals who were probably quite intelligent and unlikely to recognise nuclear power as an intelligent energy choice for the future. The EDF machine seems to be aided by unidentified insiders to government who are probably well beyond the control of the Secretary of State for Energy and Climate Change, Ed Davey, himself.

Certainly the news even coming directly from the Minister of State for Energy, Michael Fallon, does not give much credence to the best efforts of the EDF publicity machine. He says that the Government and EDF are still at odds on five or six points.

See
http://www.telegraph.co.uk/finance/newsbysector/energy/10104713/EDF-doesnt-have-us-over-a-barrel-in-Hinkley-nuclear-talks-says-Michael-Fallon.html

So what are these five or six points? I can see that the Government will be at odds over the strike price, which is the amount per MWh that a generator will be guaranteed to be paid over a defined contract period. EDF want a lot more than the Government is prepared to give. The Government would suffer political embarrassment, severe questioning, and difficulties in getting EU state aid approval if it gives EDF a higher strike price compared to onshore wind power.

EDF also want a lot longer contract than the Government is prepared to give. Indeed the Government is, it seems, already committed to giving EDF a 25 year contract whereas onshore wind will only get 15 year contracts. How do you square that one with EU state aid rules? Well, blow me on that one!  But that is not enough for EDF who want 35-40 year contracts. On top of all of this this, EDF want not just their income per MWh guaranteed, but also construction costs guaranteed by Government(this is a really big deal - it means government offering EDF a blank cheque in all but name). Well that is three, so there's more?

 Well one item that I believe that EDF wants is to be indemnified against future legislation improving safety or security at nuclear sites, from which EDF have suffered recently from the French Government operating in a post-Fukushima mode. But that is a pretty impossible demand since one Parliament cannot bind another and trying to write this into a legal agreement which can be translated into costs would, to say the least, keep some highly paid lawyers, well, highly paid for quite a long time. A fifth issue is that of inflation indexing the strike prices in the 'contracts for difference' (CfDs). Now that is a more serious issue for renewable as well as nuclear power generators since feed-in tariffs on the continent usually have some form of inflation adjustment. Without it the 'opportunity cost' of making investments into low carbon generation increases, and makes them less viable.
EDF spokespersons appear to hold out hope for concessions on this issue of inflation indexation. See:

http://uk.reuters.com/article/2013/06/18/britain-nuclear-inflation-idUKL5N0EU37Y20130618?rpc=401&feedType=RSS&feedName=economicIndicatorsNews&rpc=401

Representatives of the renewable energy industry will be (at least privately) hoping for a concession here as well, since it helps improve their position. Of course this goes for the vital issue of the level of 'strike price' that the Government will set, and that they have said will be announced in July (next month). A key reason why the Government does not want to give in the EDF's demands is that they will be under very heavy pressure to give the same terms to renewable energy sources. EDF do not want to mention, and the Government themselves will be keen to draw attention away from the fact that inevitably nuclear power will be given better terms than onshore wind, even though EDF's demands are still a long way from being met. EDF, of course, try to draw comparisons away from onshore wind and towards offshore wind. Yet even here the reality is that EDF want much higher subsidies to be committed to their nuclear plant than are ever likely to be committed to the same amount of electricity generated from offshore wind.

In order to give an idea of the negotiating positions, see Tables 1, 2 and 3.

Table 1: Treasury negotiating position

technology	Strike price	Contract length	Underwriting costs	Total cumulative  £ subsidy per MWh over contract length(assuming wholesale power price of £50 per MWh)
Nuclear power	80	25	No	750
Onshore wind	80	15	No	450
Offshore wind	100	15	No	750

 

 

Table 2 If EDF’s demands are met......

technology	Strike price	Contract length	Underwriting costs	Total cumulative  £ subsidy per MWh over contract length(assuming wholesale power price of £50 per MWh)
Nuclear power	95	35	Yes	1575 PLUS costs ‘underwriting’ bonus
Onshore wind	80	15	No	450
Offshore wind	100	15	No	750

 

Table 3: Parity between nuclear and offshore wind: if EDF’s demands are met......

technology	Strike price (£/MWh)	Contract length	Underwriting costs	Total cumulative  £ subsidy per MWh over contract length(assuming wholesale power price of £50 per MWh)
Nuclear power	95	35	Yes	1575 PLUS costs ‘underwriting’ bonus
Onshore wind	80	15	No	450
Offshore wind	155	15	Yes	1575 PLUS ‘underwriting bonus

In Table 1 above I have assumed that the Treasury is holding to the Government aspiration of reducing offshore wind costs to £100 per MWh by 2020. If the figures in Table 1 hold then there will certainly be no nuclear power stations built, but also no offshore wind either. However, the onshore wind programme will continue more or less as it is at the moment, providing there is 'inflation indexing' of the CfD strike prices.

Table 3 illustrates what would happen if offshore wind was given parity with the subsidies that EDF wants. In fact, offshore wind, especially if its costs were underwritten, would not need as higher strike price as this, illustrating what some of us have known already - that offshore wind is in fact a cheaper option compared to nuclear power. Nuclear power supporters may attempt to argue against this notion by saying that nuclear power stations last for a much longer time than offshore windfarms. This argument is itself suspect on two grounds. First it undercuts the claim made by nuclear supporters that the current fleet of nuclear power stations is retiring and that therefore we 'need' to replace them. Secondly, offshore wind infrastructure, which will amount to around half their total costs, will last a lot longer than 15 years. Indeed the windfarms could be re-bladed for much reduced costs (compared to the original installation). By contrast, energy consumers would be 'locked' in to paying high subsidies for a very long period for nuclear power when much cheaper resources would most likely be available from renewable energy sources with falling prices.

I have heard it said that DECC and the Treasury are engaged in a battle to pin the blame for the failure of the nuclear new build programme. Certainly a lot of people have an interest in prolonging the notion that new nuclear power is coming. However, just as in the Samuel Beckett play characters wait (in vain) for 'Godot' to arrive, the nuclear hopefuls will be waiting in vain. But they seem to feel that they cannot admit to the failure of their enterprise since this questions their very existence as members of a nuclear industry that is going nowhere.