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China syndrome 2.0

22 October 2015 By John Foley

Building a nuclear power plant in the United Kingdom makes simple sense. Yet the UK’s new deal to construct the 18 billion pound Hinkley Point C with the help of France’s EDF and a Chinese state-owned nuclear power group is fiendishly complex.

Nuclear power stations have lives of 60 years, so the economics are hard to judge. In this case, Britain has offered to buy electricity from the new plant at the guaranteed price of 92.50 pounds per megawatt hour to lure French and Chinese investment. The current wholesale price is around half that. Apply that difference to the plant’s estimated annual output of 25 terawatt-hours and the implicit subsidy would be over 1 billion pounds a year.

That guaranteed price is inflation-linked – so 92.50 pounds in 2012, the base year the two sides used, would be 140 pounds by 2033, the latest the plant can come online, assuming a 2 percent rate of increase. And the actual market price then prevailing is anyone’s guess. It may be higher and may mean the implicit subsidy is lowered. Yet there are many unknowns – from shale-oil production to improvements in the way renewable electricity is stored – that could keep the price low. The index-linked 92.50 pound price, meanwhile, will be locked in for 35 years.

Besides, the price question sits astride the bigger issue of how the risk gets parcelled out. On paper, EDF and China will be exposed to cost overruns, steep rises in electricity prices, and creeping costs of decommissioning the plant – which they must pay for. Britain will be exposed to the risk that voters get angry if prices stay low, or that China and France refuse to meet their obligations if prices and costs rise.

The simple thing would be for the UK government to borrow money and build Hinkley Point C itself. So why didn’t it? Perhaps because attitudes towards nuclear are deeply divided, and present-day politicians prefer an obscure fudge to a simple and sensible decision.

 

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