UK agrees nuclear power deal with EDF

The UK government has struck a deal with the French utility EDF to build the country’s first new nuclear plant in a generation.

The agreement was reached after the government guaranteed a price of £92.50 per megawatt hour for electricity produced at Hinkley Point C in Somerset. This “strike price”, which is fully indexed to consumer price inflation, is roughly double the current price of power.

It forms the centrepiece of a long-awaited deal between the government and EDF and paves the way for the construction of the £16bn power station which, when completed in 2023, will provide 7 per cent of the UK’s electricity.

Prime minister David Cameron welcomed the deal, saying it would create 25,000 jobs and that it marked “the next generation of nuclear power in Britain, which has an important part to play in contributing to our future energy needs and our longer term security of supply’’.

Ed Davey, the energy secretary, told the BBC it was expected the “vast majority” of construction workers would be British and that 57 per cent of the value of the project would go to UK companies.

Henri Proglio, chairman and chief executive of EDF, described the Hinkley deal as “a very important moment for our company”.

With a price tag of £16bn, the project will cost more than the expected £14bn. According to EDF this is because of an extra £2bn for additional work at the site, including more foundation work and adapting the design of the reactor to UK regulatory standards.

EDF and its partners will take the risk of constructing the power station to budget and schedule. The company is expected to hold between 45-50 per cent of the equity in the project.

The French nuclear developer Areva will hold 10 per cent, and two state-owned Chinese companies – China General Nuclear Power Group and China National Nuclear Corp – will hold between 30-35 per cent. EDF is in talks with other partners for a stake of up to 15 per cent.

The company expects to make a final investment decision next summer.

Mr Davey called it “an excellent deal for Britain and British consumers”.

He said a diverse energy mix was crucial to maintaining lower prices and that an overdependence on gas in recent years had caused consumer prices to rise. He insisted that building a new fleet of nuclear power stations could reduce bills by more than £75 a year in 2030. However, there are concerns about the impact on bills.

If the wholesale price is lower than the strike price when the plant starts producing in 2023, the state will pay the difference. If over the next 35 years, the market price exceeds the strike price, EDF must pay the difference to the government.

The potential costs of this agreement make it all the more crucial that we end the rip-offs and have an energy market that people trust

Richard Lloyd, executive director of consumer group Which?, said: “Rising energy bills are one of the top concerns for cash-strapped consumers, so everyone will want to be assured that the price the government has agreed for new nuclear power is fair.”

If EDF proceeds with a second plant, Sizewell C in Suffolk, the strike price for Hinkley will fall by £3/MWh to £89.50/MWh.

The reduction reflects the fact that advanced costs for a “first of a kind” nuclear power station are high, but come down with each successive plant as economies of scale kick in, a senior official familiar with the negotiations between EDF and the government said.

Critics of the deal, which will last for 35 years, also say it breaks a coalition government promise not to subsidise nuclear energy.

However, officials insist “new” nuclear is not receiving special favours, and that the same kind of government support will be offered to all other forms of low-carbon energy, such as offshore wind.

The Hinkley deal is pivotal to Britain’s plans to keep the lights on. Over the next decade, polluting coal-fired plants and ageing nuclear reactors providing 60 per cent of the country’s electricity are due to shut. Ministers argue the country must start building new generating capacity if it is to avoid blackouts.

Nuclear is also seen as crucial to hitting the UK’s binding carbon reduction targets and improving energy security by lessening dependence on imported fossil fuels.

But there are concerns that support for nuclear energy will place further burdens on consumers already hit by rising household bills.

The issue became a hot topic after Ed Miliband, the opposition leader, announced that a future Labour government would freeze gas and electricity prices for 20 months. The political debate was further stoked this month by announcements of inflation-busting price increases by SSE and British Gas. Other providers are expected to follow suit.

Caroline Flint, Labour’s shadow energy and climate change secretary, said that while her party supported the development of new nuclear power stations, “the potential costs of this agreement make it all the more crucial that we end the rip-offs and have an energy market that people trust”.

Nick Butler: expensive deal that ignores alternatives

EDF would have settled at a lower price, with lower guarantees, writes Nick Butler

“This agreement shows that long-term certainty is what really matters to unlock the investment we need to keep the lights on, not allowing overcharging to continue now,” she said. “David Cameron is now in the ridiculous position of saying that they can set prices 35 years ahead for the companies producing nuclear power, while insisting they can’t freeze prices for 20 months for consumers while much-needed reforms are put in place.”

Paul Massara, chief executive of npower, welcomed the guaranteed wholesale price for new nuclear power stations.

But he explicitly linked the move to rising household bills. “At double the current electricity price, bill payers need to understand that these higher costs will, in time, feed through and put additional pressure on the price customers pay for their energy,” he said.

The strike price covers not only the costs of building Hinkley, but decommissioning and nuclear waste management costs, too. EDF, as operator, will have to start depositing money into a special fund for such liabilities from the start of the project.

The agreed strike price should allow EDF to make a 10 per cent rate of return on the project – a condition it insisted on from the start of the negotiations. The French utility had originally insisted on a strike price of “well north of £100/MWh”, according to people familiar with the negotiations, while the government had aimed for a figure in the “mid-£80s”. The compromise figure was a “very good deal for consumers”, the official said.

EDF said it had also qualified for the Treasury’s UK Guarantee scheme, which is designed to underpin £50bn of big infrastructure projects. A company official said it would function as insurance if the project partners could not pay back borrowed funds.

Critics of nuclear energy fear Hinkley could share the fate of Flamanville, a new nuclear power station EDF is building in northwest France, which has been plagued by cost overruns and delays. But ministers insist consumers will not be on the hook if Hinkley ends up costing more to build than planned.

At the same time, the contract with EDF contains “gainsharing” arrangements, which will ensure that if the cost of building Hinkley comes in lower than budgeted, consumers will benefit.

Additional reporting by Kiran Stacey and John Aglionby