Demand for power price cuts puts UK nuclear plants’ viability in doubt
Government seeks electricity supply deals 20% cheaper than Hinkley Point
Companies vying to build nuclear power stations in the UK have been told they must offer a price for their electricity sharply lower than that approved for the Hinkley Point plant last year, raising further questions about the viability of Britain’s plans for a new generation of reactors.
Government officials have indicated that future projects will be expected to deliver a discount of at least 15-20 per cent on the price of electricity from the £18bn Hinkley plant in Somerset, a settlement was widely criticised for its high cost.
Lower prices compared with Hinkley are seen as crucial to maintaining political support for new nuclear plants, which are at the heart of UK plans to maintain energy security while lowering carbon emissions.
However, the prospect of less lucrative contracts will add to the financing difficulties facing reactor developers and intensify their demands for government help to meet multibillion-pound construction costs.
Uncertainty surrounding the UK’s nuclear “new build” programme — one of the biggest in the developed world — was highlighted this week when Toshiba said it wanted to sell its controlling stake in the NuGen consortium planning to construct three reactors at Moorside, Cumbria. The announcement, which left NuGen in need of new investors to survive, followed a $6.3bn writedown on Toshiba’s US nuclear business — another example of the high costs and risks involved in reactor construction.
NuGen is one of two Japanese-led developers expected to begin negotiations with government in the coming months over a “strike price” for electricity from new UK nuclear plants. The other is Horizon, owned by Hitachi, which is planning to build two reactors at Wylfa in Anglesey, Wales.
Strike prices represent a premium over the wholesale cost of electricity — which has averaged about £45 per megawatt hour over the past year — guaranteed to power plant developers as an incentive for urgently needed new capacity.
One senior figure in the nuclear industry said government had made clear that NuGen and Horizon must agree a “significantly” lower price than the £92.50/Mwh promised to EDF, the French utility, for electricity from Hinkley Point for 35 years. The Hinkley strike price is now worth about £100/Mwh because it was set in 2012 and linked to inflation.
“They don’t want a number beginning with nine. They would like a number beginning with seven,” said the industry figure, implying a price below £80/Mwh. Another senior industry figure said he expected a figure around £85/Mwh.
Both these people said NuGen and Horizon accepted the need for a “more competitive” price than Hinkley, which is being fully-financed by EDF and CGN of China. But they argued government help was needed to achieve this.
“One of the biggest factors pushing up the strike price is the cost of capital. If government wants a low strike price, it is pretty clear that government has to think about a different kind of [financing] solution,” said one of the industry leaders.
Both people acknowledged that government remained cautious about the idea of investing taxpayers’ money in nuclear power but they hoped some form of public support, such as loans or credit guarantees, would be forthcoming.
One of the people said there were signs the government wanted to pit NuGen and Horizon against each other in a competitive process, with no guarantee that both would go ahead. A third industry figure said such an approach would be a mistake.
“Developers have already spent billions preparing their sites and clearing planning and regulatory hurdles,” he said. “If developers are told you have to spend all that money just to enter a competition, that would have a profoundly negative impact of perceptions of the UK nuclear market.”
This person said developers would also balk at demands for a fixed discount over Hinkley. “The strike price has to come from bottom-up, reflecting the costs of the supply chain, technology and site development, rather than something imposed from top down,” he said.
Another of the industry figures said the government had to clarify its approach soon or risk investors walking away. “Government should be very nervous about losing one of these projects,” he said. “We’re at a crossroads moment and the government has to make a decision [on financing] soon.”
The Department for Business, Energy and Industrial Strategy declined to comment but an official said: “The government will always look to drive the best deal possible for UK consumers.” Horizon and NuGen declined to comment.
Hinkley Point C, approved last September and due to open in 2025, is set to become Britain’s first new nuclear power station since the opening of Sizewell B in Suffolk in 1995. Five further plants are at varying stages of development, with Moorside and Wylfa the most advanced.
They are intended to help fill the gap left by the phasing out of dirty coal-fired power stations by 2025 and the decommissioning of the UK’s existing fleet of ageing nuclear reactors.