Utility Week

UTILITY Week 22nd January 2016

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uTILITy WeeK | 22nD - 28Th January 2016 | 21 Finance & Investment government officials" and symbolises Chi- na's participation in nuclear power overseas. Decc has further shown its support for Hin- kley this week by approving a major part of the transmission link to the site. Li adds that this is part of the Chinese government's plan "to improve its interna- tional presence" and develop a sustainable plan to export local technology as part of the country's economic rebalancing. Moreover, the CfD strike price should insulate the project from any global financial shock. It seems investor caution stems more from the technology than from financial vol- atility in China and the threat of global defla- tion, recession and a commodity price crash. And despite concerns about cost overruns, it appears as though the political will to create a symbolic new nuclear power station will keep the Hinkley Point project flying, even through financially uncertain times. Finance Finding the funds Committing to the huge expense of Hinkley Point C will be a hard decision, says Nigel Hawkins. O ver the past decade, a prodigious amount of effort has been exerted in delivering the £24.5 billion Hinkley Point C project to a position where going to the markets to raise the neces- sary finance is a credible scenario. Already, an eye-watering – and inflation-linked – £92.50 per MWh contract for difference (CfD) has been pledged by the government for an unprecedented 35 years. But new challenges keep arising. In the latter part of 2015, the deep-seated financial problems at Areva, France's key nuclear construction company, became more serious. Concerns are now being expressed about the ability of EDF itself both to absorb much of Areva and to finance a massive nuclear investment programme, mainly in France. Many existing nuclear plants there are nearing the end of their natural lives. Since the start of the year, stock markets have become very nervy on the back of falling commodity and energy prices, which are partly related to the economic plight of China, where rumours of gloom abound. The oil price remains a particularly worry, although – theoretically at least – it should confer major benefits on non-oil producing countries. The plunge in oil prices has been staggering. Just 18 months ago, Brent Crude was trading at well over $100 per barrel; the current figure is below $30. Inevitably, such trends have already gravely impacted oil producers, especially in the North Sea. Gas prices have also fallen sharply, which should make the construction of Combined Cycle Gas Turbine (CCGT) plants far more attractive. If gas prices remain low, a boom in CCGT baseload invest- ment should be expected. For EDF, though, to raise the necessary funds against this dis- tinctly unpromising energy background will be extremely difficult. In recent years, it has focused on China to provide much of the financing; various agreements have been reached. But with the pro- found uncertainties hanging over the Chinese economy, activating that planned funding will be challenging. Elsewhere, likely investors may be thin on the ground, especially if widespread deflation brings a lengthy bear market in its wake. Of course, the ingrained pessimism of recent weeks may well be replaced by a tide of optimism. However, there remain many clouds on the horizon which seem unlikely to clear in the short term: China; collapsing oil and gas prices; recurring concerns about bank stability; and a possible lurch into global recession among them. As such, many institutional investors may be seeking to unload some of their asset investments as the attractions of holding cash become more evident. If this trend accelerates, asset values – many of which underpin lending – will inevitably fall. Nonetheless, over the next few months – or even weeks – EDF will need to decide whether or not to go ahead with the Hinkley Point C project. It is a mighty big call for Jean-Bernard Levy and his board – all the more so given the gathering economic gloom. Nigel Hawkins, director, Nigel Hawkins Associates Hinkley Point C: key facts Construction will require: 3m tonnes of concrete; 230,000 tonnes of steel; and 50m man hours 3.2GW capacity will be enough to meet 7 per cent of the UK's electricity needs £2 billion pounds will be pumped into the local economy during the plant's lifetime. 5,600 people will be employed on construc- tion and 900 permanent jobs will be created. 10 million tonnes of carbon dioxide emissions will be avoided annually. EDF's big decision Pros: • An unprecedented £92.50/MWh contract for 35 years providing significant income opportunities. • Potential for a new generation of nuclear assets to be built – such as Sizewell B. • A long-term baseload supply of low carbon electricity. Cons: • £6 billion asset sell-off to help fund the programme. • Risks of significant delays and cost over- runs as experienced on other EPR reactors. • The political risk that government could change or remove the subsidy arrange- ments. • The risk of an expensive stranded asset in a new, dynamic electricity generation world. timeline: 10 January 2008: the govern- ment releases a white paper giving the go-ahead for new nuclear plants to be built. 25 september 2008: EDF agrees to buy British Energy for £12.5bn and announces it intends to build four new nuclear reactors in the UK. 31 march 2009: Hinkley Point C is nominated as a potential site for a new nuclear plant in the government's strategic siting assessment. 11 may 2009: Centrica agrees to buy 20% of British Energy, with the option to take a 20% share in EDF's new nuclear reactors. 18 July 2011: Parliament ratifies a National Policy State- ment designating Hinkley as a suitable site for a new nuclear power station. 28 July 2011: West Somerset Council gives permission for preparatory work to begin. 26 november 2012: Hinkley is awarded a nuclear site licence, the first in 25 years. 13 December 2012: the European pressurised reactor designs are approved by the Of- fice for Nuclear Regulation and the Environment Agency. 4 February 2013: Centrica forfeits its option to take a 20 per cent stake. 19 march 2013: planning permission is granted. 21 october 2013: £92.50/MWh strike price and infrastructure guarantee scheme confirmed by the government. 6 may 2014: second phase of preparatory works begins on site. 8 october 2014: CfD strike price gets EU state aid clear- ance. 21 september 2015: the chancellor announces a £2bn infrastructure loan guarantee. 21 october 2015: China General Nuclear Power Corpora- tion takes a 33.5% stake in the project.

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