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Britain and EDF Sign Nuclear Plant Deal British Nuclear Bet Assumes a Role for Government
(about 11 hours later)
LONDON — The British government and EDF Group, the French state-controlled utility, announced on Monday that they had reached a long-elusive agreement to build the first nuclear power station in Britain in a generation, at Hinkley Point in southwest England. LONDON — In a back-to-the-future bet on its energy policy, the British government announced a long-elusive $26 billion deal on Monday to build the first new nuclear power station in Britain since 1995.
The overall costs would be £16 billion in 2012 terms, or about $26 billion, with consumers and taxpayers covering most of the bill. EDF will be guaranteed a price of between £89.5 and £92 per megawatt hour for 35 years, depending on whether it later goes ahead with another plant called Sizewell C that might reduce costs. The British government will guarantee 65 percent of the upfront cost of the Hinkley Point C reactors. But in many ways, it is a move that reaches even further back — beyond the deregulatory and privatization policies of Margaret Thatcher in the 1980s, to an earlier time when Britain and many other Western countries did not assume that their national energy needs would be served by market forces.
EDF says it expects to make a return on investment of about 10 percent. In reaching its nuclear deal with EDF Group, the big French state-controlled utility, and opening the door to financing from China, the British government signaled that whether in terms of environmental concerns, consumer prices or Britain’s long-term energy independence, the free market alone no longer served the national interest.
Two Chinese companies, China General Nuclear Corporation and China National Nuclear Corporation, will take a stake of 30 to 40 percent in Hinkley Point. According to EDF, which is working with the two Chinese companies on nuclear power stations in China, the companies will be “strategic and industrial partners” in the project and will be given the “opportunity to gain experience in the U.K. and will support their long-term objective of becoming leading developers in the U.K.” “This government is facing a looming energy crisis in this decade thanks to years of neglect and underinvestment,” Edward Davey, the British secretary of energy and climate change, said at a news conference in London on Monday.
Areva, the French nuclear designer and builder, will take a 10 percent stake and will do key work on the project, including the nuclear steam supply system and instrumentation. EDF said discussions were under way with other parties that could take up to 15 percent of the equity. EDF says it probably will wind up with a stake of 45 to 50 percent. Britain has been gripped by growing worries about its future power supplies, with supply falling and prices rising. Electric utilities have been reluctant to invest in new gas-fired plants to replace dirtier coal-burning ones because of many uncertainties — including a new energy bill winding its way through Parliament and the growth of subsidized wind and solar energy projects.
EDF says the deal faces hurdles. A final contract with full investment decisions needs to be signed. In addition, EDF says, the European Commission needs to decide whether the terms contract violate European rules on state aid. Mr. Davey said that Britain would need to replace about 60 percent of its generating capacity “in a relatively short time,” as Britain closes coal-fired plants to meet its climate-change objectives of cutting greenhouse gas emissions in half by 2025.
The Hinkley Point project represents an attempt by the British government to bolster the domestic energy industry. The government wants several other plants to be built to replace Britain’s aging nuclear stations, including at least one other plant operated by EDF. One goal is that building several plants will create economies of scale and the opportunity to learn, lowering costs. In the past, Britain has built plants piecemeal, raising the costs. The country will also be gradually closing its mostly aging collection of nuclear plants, which now produce 19 percent of Britain’s power. Only one of Britain’s plants, Sizewell B, which was finished in 1995, has modern technology.
The government says that up to 57 percent of the work on the plant may go to British companies and that 25,000 jobs could be created at the peak of the construction phase and 900 permanent jobs during the plant’s expected 60 years of operation. The twin reactors envisioned in Monday’s announcement are to be built at Hinkley Point, in southwest England, which is currently the locale of two 1970s-era reactors. They would advance the government’s goal of adding more low-carbon sources of energy, but the project will come with a huge price tag. It is the kind of long-term project, with an even longer horizon for paying for itself, that private investors alone would be unlikely to undertake. The overall costs of building the plants is estimated at £16 billion, or $26 billion, in 2012 terms.
The roughly £90 per megawatt hour is about double the cost of wholesale electricity currently charged by generators, and the amount is expected to spark debate over British taxpayers subsidizing nuclear power. Not that government involvement guarantees success.
Household energy prices are in the spotlight after big power companies like British Gas recently announced price increases. On Sunday, the archbishop of Canterbury, Justin Welby, called on the companies to justify the increases, citing the hardship for consumers. Last month, the Labour Party leader, Ed Miliband, called for a freeze on energy prices. To reduce the investment risk, Britain and EDF are bringing in two state-backed Chinese companies, the China General Nuclear Corporation and the China National Nuclear Corporation. EDF also says it is talking to other investors that may take as much as a 15 percent stake.
The negotiations over the Hinkley Point plant have been long and difficult. Originally, EDF, which already operates 15 nuclear plants in Britain, had intended to be in partnership with Centrica, the owner of British Gas. But Centrica withdrew from discussions, saying the economic case for a partnership was not strong enough. The Chinese companies will take a stake of 30 to 40 percent in Hinkley Point. According to EDF, which is working with the two Chinese companies on nuclear power stations in China, the companies will be “strategic and industrial partners” in the project and will be given the “opportunity to gain experience in the U.K. and will support their long-term objective of becoming leading developers in the U.K.”
While Germany wants to shut all of its nuclear plants by 2022 and shift almost entirely to wind and solar power by 2050, Britain is betting big on nuclear power. Though it is also pushing into production of shale oil and gas, Britain aims to cut greenhouse gas emissions in half by the mid-2020s in large part by renewing the older nuclear power plants. But at the news conference, Henri Proglio, EDF’s chief executive, played down the role of the Chinese companies, saying that EDF was in charge along with the French reactor designer Areva, and that British companies would be assigned more important roles.
China’s interest in the British nuclear industry signals a break from a mostly domestic focus. While China has engaged in extensive cooperation with Pakistan in nuclear power, its industry has mostly concentrated on an enormous building program at home. That EDF alone cannot finance the plant “highlights the complexities of modern nuclear power projects,” said Antony Froggatt, an industry analyst at Chatham House, a research institute in London.
If and when the new plant, Hinkley Point C, comes fully online, it will supply about 7 percent of Britain’s electricity demand. That would be enough power for six million homes, with the added benefit of no carbon emissions. Mr. Froggatt said that it would be “better to invest in other” alternative sources of energy like wind and solar power.
Consumers will also wait a long time to receive electricity from the new nuclear plants, which EDF says will provide power equivalent to 7 percent of British consumption and enough to power almost six million homes. If EDF makes its final investment decision in summer 2014, the first of the two Hinkley Point reactors will not begin producing power until 2023.
British consumers and taxpayers will pay much of the bill. EDF will be guaranteed a price per megawatt hour of £89.50 to £92.50 — about $144.50 to $149.40 — for 35 years. Those prices, to be fully indexed to inflation, would be almost double current wholesale power prices.
Analysts say that these terms may wind up being generous for EDF, which says it will make a return of about 10 percent from the project. Tom Burke, a former government adviser, said that the arrangement meant that “if wholesale prices fall, British consumers will lose out substantially.”
Vincent de Rivaz, chief executive of EDF Energy, the company’s British arm, said that any cost savings would be shared between investors and consumers. “We are highly incentivized to get it done on time and under budget,” he said.
The British government may have had little choice if it wanted to sign a deal at this time. Other potential suppliers like Hitachi of Japan are considered years behind EDF in their technology.
Nuclear power has its attractions. Unlike renewables like solar and wind it produces steady, reliable power for decades. But the upfront costs are huge and there is no payoff for a decade or more.
It is difficult to persuade a provider to build a nuclear plant without some form of guarantee, particularly now, when the emergence of shale gas in the United States and the growth of renewable energy in Europe are creating uncertainty about power prices.
“If you don’t have that insurance, you are not going to make the investment,” said Mark Hibbs, a nuclear industry analyst at the Carnegie Endowment for International Peace.
And while Hinkley Point will not begin providing power for 10 years, the high costs of the plant will inevitably stoke the debate about rising energy bills in Britain. Even as the deal was being struck, millions of Britons were learning of increases in energy charges, including more than three million customers of NPower, a utility that announced on Monday that it would increase electricity prices by 9.3 percent and gas prices by 11 percent.
“This is a terrible deal for billpayers,” said Caroline Lucas, a member of Parliament for the Greens, who called for an investigation by the National Audit Office, a spending watchdog. “At a time when the costs of renewable energy are falling, it’s reckless for the government to subsidize the nuclear industry in this way.”

This article has been revised to reflect the following correction:

This article has been revised to reflect the following correction:

Correction: October 21, 2013Correction: October 21, 2013

An earlier version of this article misstated the percentage of the stake that two Chinese companies, China General Nuclear Corporation and China National Nuclear Corporation, will take in a planned nuclear station in Britain. The companies will have a stake of 30 percent to 40 percent in Hinkley Point, not 35 percent to 40 percent.

An earlier version of this article misstated the percentage of the stake that two Chinese companies, China General Nuclear Corporation and China National Nuclear Corporation, will take in a planned nuclear station in Britain. The companies will have a stake of 30 percent to 40 percent in Hinkley Point, not 35 percent to 40 percent.