Hinkley gamble worries economic analysts

Thursday, October 31, 2013

The government's agreement to underwrite the Hinkley Point nuclear power station could turn out to be economically insane and hugely costly to consumers, City analysts have warned.

Analysts at Liberum Capital said the government's deal with France's EDF will make Hinkley Point the most expensive power station in the world with the longest construction period in the world.

The government gave the go-ahead last week for EDF to build the Hinkley Point C plant in Somerset. Its two reactors will cost £8bn each and will provide power for about 60 years once it starts operating in 2023.

The energy secretary, Ed Davey, has made a huge bet that fossil fuel prices will rocket by the time Hinkley Point starts operating in 2013, Liberum's Peter Atherton and Mulu Sun said in a report published on Wednesday.

They said: "The UK government is taking a massive bet that fossil fuel prices will be extremely high in the future. If that bet proves to be wrong then this contract will look economically insane when HPC commissions. We are frankly staggered that the UK government thinks it is appropriate to take such a bet and underwrite the economics of any power station that costs £5m per MW and takes nine years to build."

Davey controversially agreed a minimum price of £92.50 for every megawatt hour (MWh) of energy Hinkley Point generates – almost twice the current wholesale cost of electricity.

The price is also index-linked to inflation, meaning EDF can expect revenue of about £121 per Mwh by 2013, the analysts calculated. That means the price of gas will need to increase by at least 130% to make the government's agreement pay.

"Perhaps the extraordinary feature of the deal is the 35-year inflation indexing of the strike price. Nuclear stations have a very high revenue to operating cost ratios. By granting full indexing of the revenue line EDF are handed the opportunity to earn extra-ordinary returns as the project matures," Atherton and Sun said.

EDF should make about £1bn a year pre-tax profit in 2013 money when the plant starts operating – almost half the total profits made by the big six energy suppliers last year from their generation arms, the analysts said.

"Having considered the known terms of the deal, we are flabbergasted that the UK government has committed future generations of consumers to the costs that will flow from this deal," the analysts said.

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