The financial case for Hinkley Point C

The government have updated their contractual documents and supporting information for Hinkley Point C (here).

The decision taken by the Secretary of State (SoS) for the Department of Business, Energy & Industrial Strategy to direct the Low Carbon Contracts Company (LCCC) to offer a Contract for Difference (CfD) to Hinkley Point C was based on the Value for Money Assessment published on this site. This means that the Government will reimburse the operators if they have to sell electricity below the “strike price”.

This is based on the belief that, left to themselves, “market failures” would result in a undesirable configuration of the electrical generation and distribution system.

Businesses are more likely to invest where the return on capital is rapid and secure. In the electrical generation world this means gas turbines and other cheap and quick to install kit. The current designs of nuclear reactors under construction are far from this ideal. Expensive, with long lead times and technical and political risks involved. The investor has to put in a lot of money upfront and wait a long time for returns. A technical or political hitch could wipe those returns out at any time. A principle of the CfD justification is that the investor should get a fair return for risking their capital over a long period of time on a “first of class” power station. It is a risk sharing mechanism that saves the government from direct investment in the project.

The market does not fully take into account the real societal costs from burning hydrocarbons and by itself would not reduce the production of greenhouse gases associated with fossil fuel combustion. So subsidies are given to low carbon generators to bridge this unfairness. This is an area of controversy with some believing that all subsidies are wrong and others wanting them only for their preferred version of “green”. Nonetheless some of the CfD is to encourage low carbon generation.

Another consideration is diversity of supply. It is true that the British people and the British economy would be unhappy if their energy needs were more expensive than needed but they would be far more unhappy if their energy aspirations were not met. Imagine flicking the light switch and nothing happening. A large nuclear power station can provide base load electricity day in day out no matter what the weather and is slow to be affected by any disruptions in the fuel supply. This will be valuable in a future with more dependence on imported hydrocarbons and larger amounts of wind and solar power but where storage of electricity on the scale desired to stabilise a renewables dominated grid is technically and financially out of reach.

The case is laid out for all to read. Some say the strike price is too high, some say far too high. It remains to be seen if Hinkley Point C can and will be built and whether the investors will get a decent (or maybe indecent) return on capital invested.

 

 

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