This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.theguardian.com/commentisfree/2016/mar/14/hinkley-point-costly-mistake-france-britain-edf

The article has changed 2 times. There is an RSS feed of changes available.

Version 0 Version 1
Hinkley Point is a costly mistake, but only France can pull the plug Hinkley Point is a costly mistake, but only France can pull the plug
(6 months later)
Vincent de Rivaz, chief executive of EDF Energy, once boasted that British customers would be cooking their Christmas turkeys in 2017 with electricity from the proposed new Hinkley Point nuclear power station his firm is contracted to build. That was a time of optimism, and a grandiose claim in keeping with the £18bn grandiosity of the project itself; equivalent in cost to Heathrow Terminal 5 and the Olympics combined.Vincent de Rivaz, chief executive of EDF Energy, once boasted that British customers would be cooking their Christmas turkeys in 2017 with electricity from the proposed new Hinkley Point nuclear power station his firm is contracted to build. That was a time of optimism, and a grandiose claim in keeping with the £18bn grandiosity of the project itself; equivalent in cost to Heathrow Terminal 5 and the Olympics combined.
De Rivaz was wrong about that deadline and optimism is now in short supply. Business situations are often described as zero-sum, or win-win. Hinkley Point, already the site of a power station in Somerset, is a rare case where the project could be damaging to both customers and investors. It would saddle British taxpayers with highly expensive power, and risk bankrupting a major French company, whose finances are already shaky. The government should cancel the deal.De Rivaz was wrong about that deadline and optimism is now in short supply. Business situations are often described as zero-sum, or win-win. Hinkley Point, already the site of a power station in Somerset, is a rare case where the project could be damaging to both customers and investors. It would saddle British taxpayers with highly expensive power, and risk bankrupting a major French company, whose finances are already shaky. The government should cancel the deal.
In theory it could do that, but in practice it cannot – not without damaging its reputation for consistent policymaking, and scaring off the other nuclear consortia it will need to build future plants; and they are needed, in order to meet Britain’s climate change obligations.In theory it could do that, but in practice it cannot – not without damaging its reputation for consistent policymaking, and scaring off the other nuclear consortia it will need to build future plants; and they are needed, in order to meet Britain’s climate change obligations.
There is a mess, on both sides of the ChannelThere is a mess, on both sides of the Channel
So this is the dilemma: Britain needs the project cancelled, but that cancellation must come from France. We are relying on the French and EDF, which has already spent £2bn on the project, to do the right thing. But will they?So this is the dilemma: Britain needs the project cancelled, but that cancellation must come from France. We are relying on the French and EDF, which has already spent £2bn on the project, to do the right thing. But will they?
Hinkley was to be the first new nuclear reactor in the UK for 20 years, providing 7% of the nation’s electricity. But it has been undermined. The first is that the European pressurised water reactor (EPR) planned for Hinkley has turned out to be an engineering disaster. The first to be built was at Olkiluoto, in Finland. Originally scheduled to start operating in 2009, the station is now tentatively to be finished by 2018. Costs have trebled and are the subject of a multibillion-euro lawsuit that has pretty much bankrupted the EPR’s French developer, Areva.Hinkley was to be the first new nuclear reactor in the UK for 20 years, providing 7% of the nation’s electricity. But it has been undermined. The first is that the European pressurised water reactor (EPR) planned for Hinkley has turned out to be an engineering disaster. The first to be built was at Olkiluoto, in Finland. Originally scheduled to start operating in 2009, the station is now tentatively to be finished by 2018. Costs have trebled and are the subject of a multibillion-euro lawsuit that has pretty much bankrupted the EPR’s French developer, Areva.
The second station, built by EDF itself at Flamanville in Normandy, is also in deep trouble. Intended for completion in 2012, it now looks unlikely to start before 2018 and is also running at about three times the original cost. On top of that, the French nuclear regulator is investigating potentially fatal problems in the fabric of the station that could lead to it being abandoned or rebuilt at even greater cost.The second station, built by EDF itself at Flamanville in Normandy, is also in deep trouble. Intended for completion in 2012, it now looks unlikely to start before 2018 and is also running at about three times the original cost. On top of that, the French nuclear regulator is investigating potentially fatal problems in the fabric of the station that could lead to it being abandoned or rebuilt at even greater cost.
Two EPRs being built in China are also behind schedule, despite China’s expertise in nuclear construction. As the evidence grew that the EPR for Hinkley would be far more costly than expected, the talk of allowing private investment was replaced by promises of government support. The UK government will guarantee at least £2bn of debt. And it has promised that we, the electricity customers, will buy the power produced by Hinkley for 35 years at a price of £92.50 per megawatt-hour (MWh) in 2012 prices. The price would now be about £99/MWh (and will increase further with inflation). Contrast that with the current wholesale price of power in the UK, about £35/MWh.Two EPRs being built in China are also behind schedule, despite China’s expertise in nuclear construction. As the evidence grew that the EPR for Hinkley would be far more costly than expected, the talk of allowing private investment was replaced by promises of government support. The UK government will guarantee at least £2bn of debt. And it has promised that we, the electricity customers, will buy the power produced by Hinkley for 35 years at a price of £92.50 per megawatt-hour (MWh) in 2012 prices. The price would now be about £99/MWh (and will increase further with inflation). Contrast that with the current wholesale price of power in the UK, about £35/MWh.
Related: With Hinkley Point, squandermania has reached dangerous new heights | Simon Jenkins
No one knows what the price of competing power sources will be in 2025 (when Hinkley is supposed to start generating). But it would take a dramatic rise in oil and gas prices to match the Hinkley contract price. And offshore wind, the main source of renewable energy in the UK, is already coming in below £90/MWh, with a good chance that it will fall further.No one knows what the price of competing power sources will be in 2025 (when Hinkley is supposed to start generating). But it would take a dramatic rise in oil and gas prices to match the Hinkley contract price. And offshore wind, the main source of renewable energy in the UK, is already coming in below £90/MWh, with a good chance that it will fall further.
So the contract was flawed. But consider too the state of EDF. The firm has seen its market value cut to under £20bn. This is little to do with the Hinkley project: it reflects falling power prices in France, its home market. Utilities are normally financially strong companies, with steady cash generation and relatively low risk. But EDF now has a level of debt greater than its market value. It has had to borrow to pay its dividend for the past four years, something healthy companies do not do.So the contract was flawed. But consider too the state of EDF. The firm has seen its market value cut to under £20bn. This is little to do with the Hinkley project: it reflects falling power prices in France, its home market. Utilities are normally financially strong companies, with steady cash generation and relatively low risk. But EDF now has a level of debt greater than its market value. It has had to borrow to pay its dividend for the past four years, something healthy companies do not do.
Belatedly EDF’s domestic constituency seem to have woken up to the enormous risk it would be taking with Hinkley. The UK deal promises a high fixed price of electricity but leaves the construction risk with EDF and its Chinese partner, CGN, which has a one-third share of the project.Belatedly EDF’s domestic constituency seem to have woken up to the enormous risk it would be taking with Hinkley. The UK deal promises a high fixed price of electricity but leaves the construction risk with EDF and its Chinese partner, CGN, which has a one-third share of the project.
Given the dreadful construction record of the previous EPRs, one would need to be wildly optimistic to assume Hinkley would go smoothly. The estimated cost has steadily risen from £8bn (in today’s money) to £16bn (plus £2bn that has already been spent). But the stakes are higher than that. In its 2014 state aid report, the European commission required EDF and other investors to make available up to £24.5bn as extra “contingent equity” – to reduce the risk to the UK government, which would be guaranteeing some of the project debt.Given the dreadful construction record of the previous EPRs, one would need to be wildly optimistic to assume Hinkley would go smoothly. The estimated cost has steadily risen from £8bn (in today’s money) to £16bn (plus £2bn that has already been spent). But the stakes are higher than that. In its 2014 state aid report, the European commission required EDF and other investors to make available up to £24.5bn as extra “contingent equity” – to reduce the risk to the UK government, which would be guaranteeing some of the project debt.
EDF’s stock market value is about £18bn. For it to contemplate a single investment that could cost £16bn (its two-thirds share of £24bn) is astonishing. No normal company would consider such a risk, even if it hoped to make a high and predictable return in the future.EDF’s stock market value is about £18bn. For it to contemplate a single investment that could cost £16bn (its two-thirds share of £24bn) is astonishing. No normal company would consider such a risk, even if it hoped to make a high and predictable return in the future.
But EDF is not a normal company. Although privatised and listed on the Paris and London stock exchanges, it remains 85% owned by the French state, and has a major trade union (CFE-CGC) represented on its board.But EDF is not a normal company. Although privatised and listed on the Paris and London stock exchanges, it remains 85% owned by the French state, and has a major trade union (CFE-CGC) represented on its board.
Related: Hinkley Point branded potentially risky for EDF by French auditor
The latter is significant, for it was the union that first realised the risk of Hinkley. In January, it forced the EDF board to postpone a decision on committing fully to the project, fearing the cost and risk would jeopardise French jobs. Last week Thomas Piquemal, the firm’s chief financial officer, resigned, reportedly in protest against the refusal of the board to delay the project by at least three years, until the French reactor is finished and a proper cost audit can be done.The latter is significant, for it was the union that first realised the risk of Hinkley. In January, it forced the EDF board to postpone a decision on committing fully to the project, fearing the cost and risk would jeopardise French jobs. Last week Thomas Piquemal, the firm’s chief financial officer, resigned, reportedly in protest against the refusal of the board to delay the project by at least three years, until the French reactor is finished and a proper cost audit can be done.
EDF’s board is, of course, answerable to its shareholders. But there is a major conflict of interest between the private shareholders and the main one, the French government, for it would be embarrassing for the French state to have to delay or cancel the Hinkley project. And doing so could end the prospects of its EPR reactor being sold anywhere else in the world.EDF’s board is, of course, answerable to its shareholders. But there is a major conflict of interest between the private shareholders and the main one, the French government, for it would be embarrassing for the French state to have to delay or cancel the Hinkley project. And doing so could end the prospects of its EPR reactor being sold anywhere else in the world.
Jean-Bernard Lévy, chief executive of EDF (EDF Energy’s parent company), is in a difficult position. It was revealed this weekend that he told staff he wants further financial support from the French government before proceeding with Hinkley. In effect, he is asking his major shareholder to protect him against future lawsuits from the minor shareholders.Jean-Bernard Lévy, chief executive of EDF (EDF Energy’s parent company), is in a difficult position. It was revealed this weekend that he told staff he wants further financial support from the French government before proceeding with Hinkley. In effect, he is asking his major shareholder to protect him against future lawsuits from the minor shareholders.
So there is a mess on both sides of the Channel. In Britain the 2008 Climate Change Act makes future cuts in UK greenhouse gas emissions legally binding. In theory, if the government fails to hit the carbon budgets the energy secretary (currently Amber Rudd) is in breach of the law. The budget for 2023-27 depends on Hinkley going ahead, as well as a full contribution from offshore wind. And after this, Britain will need at least three other new nuclear stations to replace old ones that will have closed.So there is a mess on both sides of the Channel. In Britain the 2008 Climate Change Act makes future cuts in UK greenhouse gas emissions legally binding. In theory, if the government fails to hit the carbon budgets the energy secretary (currently Amber Rudd) is in breach of the law. The budget for 2023-27 depends on Hinkley going ahead, as well as a full contribution from offshore wind. And after this, Britain will need at least three other new nuclear stations to replace old ones that will have closed.
The British government must also consider its “golden” relationship with China. For, once it became clear that EDF couldn’t fund Hinkley on its own, the UK turned to its longstanding Chinese partners – an arrangement reaffirmed during president Xi Jinping’s state visit to the UK last October. How embarrassing would it be for David Cameron to have to explain to the Chinese that we were now cancelling the project? Too embarrassing, perhaps. He needs the French to pull the plug. We all do.The British government must also consider its “golden” relationship with China. For, once it became clear that EDF couldn’t fund Hinkley on its own, the UK turned to its longstanding Chinese partners – an arrangement reaffirmed during president Xi Jinping’s state visit to the UK last October. How embarrassing would it be for David Cameron to have to explain to the Chinese that we were now cancelling the project? Too embarrassing, perhaps. He needs the French to pull the plug. We all do.