Utility Week

Utility Week 1st November 2013

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

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Finance & Investment Market view Strike it lucky? So a nuclear strike price for Hinkley Point C has been agreed between the government and EDF, but is it a good deal? Dan Roberts crunches the numbers. L ast week the government agreed a price with EDF for the output of Hinkley Point C. The deal guarantees the company £92.50/MWh for the proposed new nuclear plant for a 35 years (with a small reduction in price if EDF builds a second nuclear plant). Debate has raged over whether this is the "right" price. No matter how detailed the assessment from the Department of Energy and Climate Change (Decc), the truth is that no-one really knows. But what evidence there is makes the price look reasonable. Decc has just updated its estimates of generation costs. It says the numbers should not be considered a guide to strike prices, however their central estimate of £90/MWh, based on a 10 per cent real pre-tax return, is close to the announced figure. The key element in this central figure is the overnight construction cost, estimated as £4,100/kW for a first of a kind plant (excluding pre-development costs of £210/kW). Decc's high case is around £4,600/kW, and its low case £3,700/kW. EDF's proposed plant will be an EPR, a design that is already being built at Flamanville in France and at Olkiluoto in Finland (as well as in China). Both the European projects have suffered delays and cost increases. EDF originally expected Flamanville to cost €2,000/kW, but in late 2012 it revised the cost up to €5,000/kW (just over £4,000/kW at today's exchange rate). It will be four years late coming on line. The US Energy Information Administration's 2013 estimate is $5,530/kW (£3,435/kW) for a third generation PWR. Although this suggests a significantly lower cost, no new projects have yet been completed in the US, so there is no proof that the lower costs can be delivered. Numerous other international data sources exist, some quoting much lower numbers, but these are often for countries with very different planning and safety regimes, and so are unlikely to be reliable benchmarks. On these numbers, Decc's strike price does not look out of line. That does not mean the rest of the Decc proposal is the best it could be. EDF has been guaranteed a price for 35 years, which leaves customers bearing wholesale risk. However, since many wholesale price drivers are politically driven (the carbon price and renewables subsidies), there is some logic here. The deal does leave EDF in a good position, since it guarantees it against all wholesale price movements, including that of gas. We are where we are. The way policy has been developed, the government can only review the best evidence it has, set a price and see what happens. Steps one and two are complete: now only time will tell. Dan Roberts, director, Frontier Economics 20 | 1st - 7th November 2013 | UTILITY WEEK Investor view Daniel Wong "Despite the huge demand for capital, in most cases the opportunity to invest is open to only a few, incumbent regulated utilities." I t is well known that the European utilities sector is in desperate need of investment. What may well be surprising for some is the shortage of suitable investment opportunities in regulated utilities. The water sector needs material investment to repair and maintain ageing networks of pipes and sewers. It also needs capital expenditure to upgrade systems. In the energy sector, a changing generation mix, security of supply concerns and growing demand is driving massive demand for investment in gas and electricity transmission and distribution networks. Despite the varied drivers for network investment and capital expenditure, in most cases the opportunity to invest is open to only a few, incumbent regulated utilities. However, we see this changing. Recently, Ofgem set up a new framework relating to the funding of certain offshore transmission networks connecting large offshore windfarms in the UK. The process involved "Around tendering a number £1.5bn will of separate transhave been mission projects (Ofto) in a transparraised by ent and competitive Oftos by the process. With eight end of the Ofto projects closed to date and another year" due to close in the coming weeks, around £1.5 billion of funding will have been raised by the end of the year. There is an additional c£1 billionworth of projects due to be closed in 2014. The response has been overwhelming. The list of interested investors and capital providers reads like a Who's Who of the infrastructure world – Mitsubishi, Barclays, Macquarie, Balfour Beatty, UK pension funds and Japanese banks, as well as National Grid. These investors have brought with them new sources of capital, lenders and expertise and, combined with a new revenue model, proven value for money to end users. Meanwhile other major infrastructure projects are exploring similar models to attract new capital and funding competition. In the UK, there are a number of large projects in the water, gas and electricity sectors and in Germany; Tennet-owned Transpower has its own version of the Oftos. So it would seem introducing competition is a good thing, even when it comes to traditional monopoly businesses. Daniel Wong, head of power & utilities, infrastructure and real estate, Macquarie Capital Europe

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