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UTILITY WEEK | 30TH OCTOBER - 5TH NOVEMBER 2015 | 19 Finance & Investment Opinion Peter Atherton Hinkley Point C is risky and very, very expensive. F irst, EDF must be congratulated for get- ting the Hinkley Point C (HPC) project (very nearly) over the line. EDF's per- severance and ability to overcome the many hurdles that this project has faced deserves considerable respect. On the other hand, the UK government's perseverance with this project is inexpli- cable. EPR technology is very complex, eye-wateringly expensive, and has never yet been built successfully. Many of the economic factors underpinning the project have changed materially and negatively. These facts alone should have set off every red warning light in Whitehall and caused the government to pause and rethink. Nuclear power stations are not economic for the private sector to build in the UK and probably never will be. Therefore, if they are to be built, the government needs to underpin the economics by socialising cost and risk onto consumers and the taxpayer. In the case of HPC, the government has done this by forcing the power price risk onto the consumer via the 35-year contract for dif- ference, and making the taxpayer liable for part of the construction and financing risk by providing a £10 billion guarantee. This could be justified on the basis that HPC will provide "public goods". The govern- ment argues that it will provide three distinct benefits: baseload electricity, zero carbon output, and an effective hedge against volatile fossil fuel prices. There is no doubt that these public goods do have some value for society and the economy. But there is also no doubt that HPC is risky and very, very expensive. A well-designed process would have seen the government assess and estab- lish the value of these public goods and then compare that to the cost. Only if the value of the goods was clearly in excess of the project cost should the government place taxpayers/ consumers at risk. It is clear that this calcula- tion has not been properly addressed. It now seems likely that HPC will enter construction soon, so we must hope that the build is a success. Because if it goes wrong, it will be everyone's problem. Peter Atherton, utilities analyst, Jefferies 27,000MW of new gas-fired power stations, solving the "energy crunch" for a generation. Perhaps the extraordinary feature of the deal is the 35-year inflation indexing of the strike price. By granting full indexing of the rev- enue, EDF is handed the opportunity to earn extraordinary returns as the project matures." The so-called "strike price" will pay EDF a guaranteed revenue based on the prevailing wholesale market price, which at the time its contract was agreed was significantly higher than the historic lows seen in the market now, meaning inflated returns for the same technology through the top-up payment. Although future power prices are difficult to predict, many analysts believe that lower prices are likely as subsidised renewable energy plays a greater role in the market, driv- ing prices lower and Hinkley earnings higher. And higher consumer costs for Hinkley could be just the start. The agreement with China is set to reignite the UK's floundering new nuclear ambitions and pave the way for the Chinese nuclear firm to develop a second new nuclear plant at Sizewell and a nuclear plant of its own design in Essex, in which it will take a two-thirds stake. HSBC notably hit out at the plans, saying The Hinkley deal could see Chinese energy investment in the UK more than double once a final investment decision is reached within weeks from now. Since 2005, China has ploughed just over $29 billion (£19 billion) into the UK, according to the American Enterprise Institute. Energy has been the second largest UK sector to benefit, so far receiving $5.7 billion (£3.7 billion). it sees "ample reason" for the project to be scrapped. The bank set out eight concerns with the project, including the UK's declining demand for power; a threefold jump in the UK's interconnection capacity with continen- tal Europe by 2022 and "a litany of setbacks" in Finland, France and China for the same EPR nuclear model planned for Hinkley. The possibility of a delay is high. And EDF's contract with the government stipu- lating a 2033 start date hardly offers confi- dence that the 2025 start date will be met. It is in EDF's best interests to complete the task and produce power as soon as possible, but equally it's in the best interest of the govern- ment to plug the growing gap in the UK's gen- eration capacity. Or perhaps by 2025 the task of balancing the system might not be as for- midable as it seems for the coming months. "From a consumer's point of view, the solar on the rooop is going to be the baseload," National Grid boss Steve Holliday said in a recent interview. And peakload will be managed by shiing demand and ramping up centralised generation, which is flexible. In a decade's time, Hinkley might well find itself an ornamental reminder of the costly mistakes of the past. Agriculture Energy Finance Metals Real estate Technology Tourism Transport Other utilities Chinese investment in UK 2005-15 (US£bn) 2.3 1.1 Source: American Enterprise Institute Source: EDF 3.8 5.7 4.7 0.8 0.2 0.3 9.1 9,000,000 tonnes (approx) of CO2 avoided each year, equivalent to roughly 2 million cars 1995 Last time the UK opened a new nuclear power station 3.2GW power plant with two reactors 25,000 new employment opportunities created during construction