The government’s policy regarding nuclear energy is at risk of unravelling. The final okay for Hinkley C has now been delayed by EDF energy. Despite the masses of money thrown at them by the government, EDF are hesitant because it represents a massive financial risk. Many of the company’s leading creditors, workers and shareholders have urged them to pull out of the deal, pointing to the similar train wreck in Finland. That project is now nine years late and at least three times over its original budget.
Hinkley C has already been delayed multiple times (a 2025 startup is now seen as optimistic, 2030 is more likely) and already the budget has ballooned to £24.5 billion. Indeed, the recent delay is largely because EDF simply doesn’t have the cash reserves to finance the project and is having to scramble around looking for more before they can make the final decision (….as to whether or not to embark on the biggest white elephant in European history!)
While the expectation is that the project will go ahead anyway, but this is more because there’s so much riding on it, that neither EDF nor the government can really back out with consequences. It is basically a shotgun wedding. Put quite simply the Tories entire energy policy will collapse if Hinkley C isn’t built and work doesn’t start on it soon. However, what I’m hearing from those in the energy trade is that its doomed anyway.
One of the reasons for EDF’s hesitations is that its share price has nearly halved in a year. This is likely because there is a brisk business in short selling of its stock and several analysts have told investors to dump EDF stock. Now normally a state owned company sitting on a massive government subsidy would not be vulnerable to such tactics. But most company’s would be able to tell the markets how much the project was going to cost and how long it would take, something EDF can’t do here, hence their vulnerability.
Previously the UK government tried to get the banks to pay for Hinkley C without any form of subsidy and they pretty much got laughed out of the room. So you can understand both EDF’s vulnerability on this issue (it could literally bring down the firm if things go badly wrong), market scepticism towards nuclear energy and why the short sellers are having a field day exploiting all of this.
Hinkley is quickly becoming the beast that will not die….and they haven’t even started building it yet! But its when the plant is actually built that the fireworks will really start (or so I’m told). Hinkley C will be selling electricity at well over the market rate, but why would the traders actually bother to buy it? In theory under the proposed CfD system its electricity will be sold via a government quango the LCCC. In return for buying power off this firm, the companies will receive credits, which will count towards meeting their supplier obligations (called ROC’s).
However, the problem with this system is that there are other ways for suppliers (that is the people who pump electricity into your home) can meet their obligations. Obviously they can achieve the same credits (sometimes more per MWh) by buying renewable electricity, which is often cheaper. They could simply opt to use fossil fuel based power and pay a fee to buy their way out of their ROC obligations. And at current market prices, it would be cheaper to do this than buy Hinkley’s electricity. Obviously one assumes EDF will use Hinkley’s power, but if all the other company’s avoid Hinkley (except when they are desperate for power) then EDF’s electricity prices will soar, customers will flee, EDF goes to the wall and Hinkley will be mothballed after perhaps a few years operation.
Obviously the above will explain why the government recently cut renewable subsidies and announced the closure of coal plants by 2025. The economics of Hinkley C only work if there’s an artificial shortage of power in the UK. But if this is indeed the government’s plan, then its a very dangerous one. As noted, its unlikely Hinkley C will be operational before the bulk of the UK’s nuclear fleet hits the end of their service life. This will create a very large gap in the UK’s generating capacity, with no easy way of filling it in the short term….other than to reverse policies on renewables or fossil fuel plants or building large interconnectors with other EU countries. Of course once that infrastructure is in place, the need for Hinkley C evaporates.
And of course we are assuming here that Hinkley C will be profitable to operate at this strike price of £92.50 (inflation adjusted). Some authors suggest it would likely need to be closer to £164, once the inevitable overruns and inflationary cost increases are factored in (while the strike price accounts for inflation changes to electricity price, it does not factor in say, concrete prices going up by some amount in the next ten years, increasing the cost of building Hinkley C) as well other off the books costs (decommissioning for example). This implies that a future government might be forced to increase the strike price yet further, or abandon the project half built.
The government also seems to be assuming that the market traders are a bunch of Buddhist monks, who won’t dare do anything like manipulate electricity prices to boost profits. However, as events in the Californian energy crisis show, there are a host of ways traders can manipulate energy supplies (e.g. shut down key pieces of kit “for maintenance” at inconvenient times, buy time on a crucial inter-connector and use it to send power out of a region where prices are high, so they can push the price further) . We could actually see a situation where there’s a power crisis in the UK, yet Hinkley C is turned off for a combination of safety reasons (nuclear reactors need a reliable grid input to operate safely and would be the first things to trip in the event of a major energy crisis) and economic factors related to market manipulation by traders.
And keep in mind that many of these traders (being the types who dislike government subsidy or interference) really don’t like Hinkley C one little bit and would be delighted to profit off the back if its demise. And of course some of them (the aforementioned short sellers) already are profiting quite handsomely. I was asked a few years ago by someone who works in the city whether it would be possible to profit from new nuclear power. My response was along the lines of “not legally” (I’m sure ISIS would give you a few million for some fissile material!). Well it would seem they managed to find a way after all. Which is just as well, as it probably makes them the only people who will actually make money out of Hinkley C.