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Finance & Investment Analysis Was Hinkley a good deal? The government managed to reach an agreement with EDF for the building of a new nuclear plant, but is the UK paying billions of pounds more than it should? It looks like it, says Tim Probert. T he reported costs of the proposed Hinkley Point C nuclear power plant rose from an expensive £10 billion in 2012 to an eye-watering £16 billion within the space of a year. Why so much? During a 21 October investor conference call, the group chief executive of French state-owned utility EDF, Henri Proglio, estimated the construction cost of the 3,260MW, twin EPR reactor project at £14 billion, "in line with the amounts committed to the EPR at Flamanville", that is, £7 billion each. EDF estimates that a further £2 billion will be necessary due to the specifics of the UK regulatory regime and site specifics of Hinkley Point C. The total estimated project cost, therefore, is £16 billion. Thomas Piquemal, EDF's group finance senior vice president, confirmed that the additional £2 billion did not include construction costs. "The investment cost is estimated to be £16 billion, consisting of £14 billion of construction costs and £2 billion of other costs such as the acquisition of the sites, preparatory work for the various regulatory authorisations and the training of the 900 future employees of the nuclear station," he said. Later in the conference call, Proglio spoke of a "series effect", that is, a reduction in construction costs arising from experience learned the hard way from the long-delayed and over-budget Flamanville 3 EPR in Normandy, initially estimated at €3.3 billion (£2.7 billion). Proglio said: "There is a series effect since we took lessons from our experience in Flamanville 3 and in Taishan [China] and compared to the cost of Flamanville 3 we are able to reduce significantly the cost of an EPR if we were to build a new Flamanville 3." He went further: "If we had to build a new Flamanville 3 it would cost £2 billion less." That would put the cost of a new EPR reactor in France at £5 billion, rather than £7 billion for Flamanville 3, and suggests the overall construction cost of Hinkley Point C could be £12 billion (£10 billion for two EPRs plus £2 billion for "specificities") rather than £16 billion. Yet the construction cost of EPRs at Hinkley Point C remains £7 billion each, exactly the same as the delayed, hugely over-budget Flamanville 3. Pressed on this by a curious journalist from French newspaper Les Echos, who was clearly wondering how the "series effect" seemed to have no effect on the construction cost of EPRs built across the Channel, Proglio gave this response: "The lessons learned… are offset by the site specificities for Hinkley Point, the regulatory environment in the UK and all specificities for Hinkley Point C. The significant decrease offsets the additional incremental work that we have to perform and to carry out at Hinkley Point." But didn't Piquemal say site specificities were accounted for by the £2 billion on top of the £14 billion construction costs? Confused? Proglio tried to explain. "We have to have many ancillary buildings at Hinkley Point C that we don't need for Flamanville. The site has a geologically different nature, softer ground and we have to do more earthworks and to put more concrete underground as a consequence. "We have to take into account the fact that the Severn Estuary is the large tidal flow location and there are many issues of that nature which leads to a more expensive cooling system when you are going to get the water in the sea to cool the power station." Although EDF says a new EPR in France would now cost £5 billion, in Britain it is, in effect, £8 billion. As Hinkley Point C is a twin reactor project, the difference between a "new" twin-reactor Flamanville 3 and Hinkley Point C would be effectively £6 billion. Even allowing for the additional regulatory issues and site specifics plus land, training costs, and so on, does it really cost £6 billion more to build two reactors of the same design in Britain than in France? Evidently so. This matters because the British government wants consumers to pay for Hinkley Point C via an index-linked feed-in tariff at £92.50/MWh for 35 years (which during the conference call even EDF Energy chief executive Vincent de Rivaz said was a "high price"). This, remember, is for a 3,260MW power plant that EDF expects will have an availability factor of 91 per cent. In his "flabbergasted" note published on 30 October, utility analyst Peter Atherton of Liberum Capital estimated that Hinkley Point C would earn EDF and its investment partners up to £80 billion over the 35-year lifetime of the deal. If EDF had overpriced Hinkley Point C by 25 per cent it could cost British bill-payers up to £20 billion in additional subsidies. Proglio concluded that the British government had examined the figures and were satisfied with the £14 billion plus £2 billion cost, whichever way it had been calculated. "[This is] fully understood by the government because all those "If we had to costs have been scrutibuild a new nised, analysed, chalFlamanville lenged by government, by the consultants and they 3 it would have been convinced that cost £2bn these costs are justified and they are in the strike less." price," he said. The full transcript is worth a read. It contains information about the nature of the Hinkley contract, especially its financing, which is not disclosed in either the 21 October press release from Decc or EDF. It includes de Rivaz saying that decommissioning costs had been factored into the strike price at between "£2-2.50/MWh with a cap at £3/MWh and any difference will be passed through to consumers". De Rivaz also states that the Hinkley Point C contract will contain "protection mechanism against adverse changes in expected operating costs such as uranium price or labour cost, and changes in other costs which are out of NNB [Nuclear New Build, and EDF company) controls such as transmission charges and business rates." Tim Probert is a freelance journalist. This blog was first published on his website, www.millicentmedia.com UTILITY WEEK | 17th - 23rd January 2014 | 17