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UK nuclear power plant contract: £80bn deal or no deal? UK nuclear power plant contract: £80bn deal or no deal?
(2 days later)
The British energy secretary, Ed Davey, has signed the first new nuclear contract with French state-backed utility firm EDF, admitting only a clairvoyant could know the true cost to the taxpayer of the 35-year contract because of the uncertainty of future energy prices. David Cameron was accused on Wednesday of jettisoning his commitment to the environment when he capitulated to the pressure of spiralling energy costs by announcing he will roll back green levies that the government says is adding an unacceptable average of £112 to household bills.
Energy academics said on Monday that the deal was a gamble, but estimated the cost would be at least £80bn over the life of the two new reactors to be built in Somerset, or roughly £3.5m a day for each reactor at current rates. The cost will depend on how energy prices move over the next 30 years. Cameron's coalition partners, the Liberal Democrats, immediately accused Cameron of a "panicky u-turn" and making policy on the hoof, but conceded they had agreed to "stress test" the green levies to see if they are being implemented efficiently, and at minimum cost.
Ministers made it clear that future governments would be locked into the contract, set to run until 2058, or face large penalties to compensate EDF. The Treasury has also been forced to offer loan guarantees to underwrite the finance for the investment, which is being undertaken by a consortium of French and Chinese investors. It is possible that the two parties could yet reach an agreement in time for the autumn statement by transferring some of the multi-billion cost of the green levies from the consumer to the taxpayer. The Scottish Nationalists proposed the same transfer last week.
The contract – which was signed as npower became the third major energy supplier to announce inflation-busting price rises – attracted strong criticism from some environmental groups, who said the price was excessive and the issue of waste unresolved. The deadlines to meet some of the levies may also be delayed.
But industry groups and the front benches of all three political parties welcomed the deal as providing low-carbon power, belated investment certainty and up to 25,000 jobs. David Cameron said the deal kick-started a new generation of energy investment, a point likely to be underlined on Tuesday when Danny Alexander, the chief secretary to the Treasury, announces a raft of smaller energy infrastructure investments. The Liberal Democrats said they will hold discussions with Cameron, but insisted they would not compromise on ends "protecting the environment, helping the fuel-poor and safeguarding our green industries and jobs".
Davey said consumers would pay £92.50 per megawatt hour once electricity was generated from the two reactors at Hinkley Point, falling to £89.50 if another contract is signed for a site at Sizewell. This "strike price" will rise in line with inflation, and will be paid for 35 years after its building, subject to periodic reviews to scrutinise wholesale energy prices. In practice, the largest proportion of the so-called green levies go to help the poor with energy efficiency measures, and Cameron's commitment to roll them back comes only a day after the former Conservative prime minister Sir John Major had warned millions of the nearly poor faced a choice between eating and heating this winter. Conservative sources insisted they would not allow support for the poor to be reduced this winter.
Davey said the money to be paid to EDF – twice the current wholesale price of electricity – represented fair value. Cameron also appeared to accept for the first time that the system of energy regulation is not working when he announced an annual energy competition review to be conducted jointly by Ofgem, the Office of Fair Trading and the new Competition and Markets Authority. Further details of the new competition test will be announced by the energy secretary Ed Davey next week, but it will cover profits, competition and communication with customers.
The coaliton agreement signed in 2010 opposed providing nuclear industry with any public subsidy, a position reaffirmed by the Liberal Democrats at their conference this autumn. The conference also ended the party's opposition in principle to nuclear power. Labour has vowed to replace the energy regulator Ofgem for over a year, something the coalition opposed, but Cameron's announcements on Wednesday are an implicit acknowledgement that the regulatory system is inadequate. The review, due to make an initial report next Spring, may look at the way in which the industry is vertically integrated – a system that critics say leads to the industry selling to itself.
Davey effectively redefined the coalition's "no subsidy" policy at a press conference: "Our policy is that [we will] not provide a public subsidy unless similar support [is given] for other suppliers of low-carbon generation. Nuclear is getting no special favours." Renewable energy is also receiving a larger subsidy, albeit for a shorter period. Davey argued that the consumer, not the taxpayer, would pick up the tab. Cameron's announcements at prime ministers questions follows weeks in which Ministers have groped for a coherent response to the Labour commitment to freeze energy prices for 20 months. The timing appears in part to be prompted by Sir John Major's surprise call for a windfall tax on the energy utilities.
David Boyle, a Lib Dem adviser to Nick Clegg, said: "Everyone knows that nuclear energy would be impossible without some kind of guarantee, and I seriously doubt whether EDF will ever make money even on that one. But that was not what we promised ourselves, let alone anyone else. The party's embarrassing new policy repeats the same glib non-position – no nuclear subsidies – when that is precisely what is now being agreed." Liberal Democrats were given 30 minutes notice on Wednesday that Cameron would make his announcement at prime ministers questions, prompting a senior Liberal Democrat to claim no properly worked out policies had been put in front of them.
Insisting he had struck a good deal, Davey said EDF had been forced to accept the costs of decommissioning nuclear waste in the strike price, and if the plant was constructed for less than the projected costs, the taxpayer and EDF would share the savings. He said that between now and 2023, EDF and its partners, including Chinese state-owned firms, would invest £16bn in the UK. The companies expect to make at least a 10% return on their investment. But Cameron told MPs: "I want more companies. I want better regulation. I want better deals for consumers. But yes, we also need to roll back the green charges that he [Mr Miliband] put in place as energy secretary [under Gordon Brown]. According to Number 10, green levies are due to rise from £112 annually to £194 – or 14% of the typical household bill – by 2020 if there is no policy change.
However, the number and quality of UK jobs at the site remains in doubt. Vincent de Rivaz, chief executive of EDF in the UK, made it clear that only up to 57% of the 25,000 jobs in the construction phase could go to British workers. Hinkley Point C will come onstream in 2023 and will be the UK's first new nuclear power station since 1995. The PM's spokesman said: "One way or the other the prime minister is determined to roll back green levies. There have been discussions about more targeted support since George Osborne's speech on 9 September."
Antony Froggatt, from the Chatham House thinktank, said EDF's costs projection had already increased markedly. "In 2006, its submission to the government's energy review stated [the type of reactor to be used, a European pressurised water reactor] would cost £28.80 per megawatt-hour in 2013 values," he said. "This more than threefold increase [to £92.50], over eight years, puts the cost of nuclear electricity at about double the current market rate – higher than that produced by both gas and coal-fired power stations, and more costly than many renewable energy options." Miliband responded by claiming Cameron came up with a new policy every day of the week, and pointed out 60% of the green levies were introduced by Cameron's own government. He ridiculed Cameron: "Who is the man who said vote blue to go green? It was him. I tell you what's weak – it's not standing up to the energy companies, and that is this prime minister all over."
Projects to build new reactors in France, Finland and elsewhere have run into delays and cost increases. Robert Gross, of Imperial College, told the Guardian: "Reactors have been built on time and in budget in some parts of the world but recent experience in Europe is not encouraging. What we do not yet know is whether [nuclear] will turn out to be a low-cost, low-carbon option. You could say that the UK government is helping the world find out." The energy companies have been campaigning for the levies to be scaled back for months, but Davey told the Guardian at the weekend that "anyone with GCSE maths can work out that energy bills are not rising due to green taxes".
Davey rejected this, saying other countries such as France, Finland and China, were also pursuing nuclear options. He said EDF and its partners had a vested interest in completing the project on time, because they would not be paid until they started generating electricity, and that they would carry any cost overruns. Energy consumers would pay £77 less a year by 2030, because of the nuclear investment. The former energy secretary Chris Huhne also attacked the move saying :"Don't shoot ourselves in the foot. For the government to end a charge that cuts our energy bills by £100 in 2020– that would be crazy".
John Sauven, executive director of Greenpeace UK, said: "Hinkley C fails every test – economic, consumer and environmental. It will lock a generation of consumers into higher energy bills via a strike price that's nearly double the current price of electricity, and it will distort energy policy by displacing newer, cleaner technologies that are dropping dramatically in price." Peter Luff, the Tory former chairman of the business select committee, summed up the Conservative dilemma saying "When you are in the red, it is difficult to vote blue and go green."
Nina Skorupska, chief executive of the Renewable Energy Association, said the nuclear deal would not solve the short-term problem of keeping the lights on as current nuclear and many coal-fired power stations were expected to shut down in the next few years, long before Hinkley C started operating. Government figures show that £50 goes on the energy company obligation – which supports energy efficiency in poorer households. A further £11 goes towards the warm homes discount, which is designed to help with the costs of fuel bills for poorer households.
"[It] is a major development for the UK energy mix, but does nothing to address the looming capacity crunch. Hinkley will still be a construction site when old coal and nuclear capacity is shut down," she said. The other charges are meeting the UK's renewable obligations (£30), the EU's emissions trading scheme (£8), the carbon price floor (£5), feed-in tariffs (£7) and smart meters (£3).
John Cridland, director general of the CBI, said: "New nuclear plants must be a fundamental feature of our future energy landscape. This investment will help mitigate the impact of increasing costs. Energy prices are going to have to go up to replace ageing infrastructure and meet climate targets unless we build new nuclear as part of a diverse energy mix." Tensions between the two parties may come to an early head on Monday when Lord Stern, author of the landmark 2006 report on the economics of climate change, will table an amendment to the energy bill compelling the UK to set a decarbonisation target before 1 April next year.
Henri Proglio, group chairman of EDF, was scathing of energy policy under previous governments. "One of the most tragic aspects of the past few years has been the way you have approached the debate on energy policy," he said. The adoption of a decarbonisation target for 2030 is official Lib Dem policy and many of its peers are thought to support the amendment.
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