Hinkley Point C Contents

1The Government’s decision to support Hinkley Point C

1.On the basis of a report by the Comptroller and Auditor General, we took evidence from the Department for Business, Energy & Industrial Strategy (the Department) and from HM Treasury on their roles in the government’s deal to support Hinkley Point C nuclear power station.1

2.The Department announced on 29 September 2016 that it had agreed a contract with NNB Generation Company (HPC) Limited (NNBG) to support the construction of Hinkley Point C. NNBG is owned 66.5% by Electricite de France (EDF) and 33.5% by China General Nuclear Power Group (CGN). It took nearly four years to negotiate and finalise the deal. The deal guarantees that NNBG will receive £92.50 (2012 prices), linked to inflation, for each megawatt hour (MWh) of Hinkley Point C’s electricity for 35 years, with electricity bill-payers paying top-ups if the wholesale electricity price is lower.2 The Department estimates that top-up payments wll cost consumers around £30 billion over the 35-year contract.3

3.Hinkley Point C, which NNBG expects will cost £19.6 billion to build, will be the first new nuclear power station in the UK since 1995.4 The Department expects that the 3.2 gigawatt power station will generate around 7% of the UK’s electricity from the mid-2020s. The Department hopes that Hinkley Point C will be the first in a series of government deals to support nuclear power stations. This is because it regards nuclear power as being central to its strategic aim of managing the energy ‘trilemma’: providing a supply of electricity that is secure, is affordable for consumers and contributes to the UK’s statutory decarbonisation target to reduce carbon dioxide emissions by 80% in 2050 compared with 1990 levels.5 But nuclear power, like other low-carbon power technologies, is currently too expensive in the UK to be commercially viable for private developers without government intervention.6

The weakening case for nuclear power

4.The government last formally considered its strategic case for nuclear in 2008.7 The Department told us that nuclear power is important because it complements intermittent renewable technologies, such as wind and solar, by being able to provide a reliable source of low-carbon electricity.8 But the estimated costs of electricity from nuclear power stations have more than doubled since 2008—from around £48/MWh (in 2012 prices) to £92/MWh.9 At the same time, the costs of alternative low-carbon technologies—in particular, wind and solar—have fallen faster than expected. In September 2017, the government announced that it had agreed new contracts to support offshore wind in the mid-2020s for £57.50/MWh, nearly half the cost of electricity generated by Hinkly Point C.10 Additionally, the Department’s estimate of the cost of consumer top-up payments over the 35 years of the Hinkley Point C contract increased to £30 billion in March 2016, compared to the £6 billion it estimated in October 2013, as a result of significant decreases in the projected price of wholesale electricity.11

5.Despite these developments, the Department did not seek to renegotiate a new deal for Hinkley Point C after it agreed provisional terms in 2013. The Department told us that the idea that it could renegotiate the deal was “fanciful”.12 At the time, EDF and CGN’s expected rate of return on the project had fallen from 9.9%, when provisional terms were agreed in 2013, to 9% at the time the deal was finalised. This is towards the bottom of the range of what the Department assessed to be a fair return, although still relatively high given EDF and CGN are state-owned companies.13 The Department therefore considered it extremely unlikely that EDF and CGN would accept a lower return, and felt that attempting to reopen negotiations could cause the deal to collapse or be significantly delayed.14 Furthermore, it was concerned that any attempt to renegotiate the deal would have had a negative impact on other investors’ confidence to develop their own nuclear projects.15

6.We pressed the Department on when it would next consider the strategic case for supporting nuclear power, particularly given the changes that have occurred in the energy sector since 2008. The future of nuclear power is also uncertain. For example, small modular reactors may serve as an alternative means of deploying the technology, while advances in storage could reduce the challenges of intermittency from wind and solar power. The Department told us it believes that the strategy for nuclear put in place in 2008 is still valid and that, at this point, it sees no need for a root-and-branch review of whether the government should support nuclear power.16

Impact on consumers

7.The deal guarantees that NNBG will receive £92.50 (2012 prices), linked to inflation, for each megawatt hour (MWh) of Hinkley Point C’s electricity for 35 years. If the wholesale price is lower than £92.50, NNBG will receive consumer funded top-up payments. By September 2016, falling wholesale prices had reduced expected energy bills overall, but meant that forecast top-up payments for Hinkley Point C had increased to around £30 billion over the 35-year contract. The Department estimates that between £10 and £15 of the average annual household electricity bill (in 2012 prices) will go towards supporting Hinkley Point C in the period 2026 to 2030.17 Understanding consumer impacts is important because the use of levies on energy bills has the potential to hit the poorest households harder than taxpayer-funded investment.18

8.There were gaps in the Department’s assessment of the deal from the perspective of consumers. It only considered the deal’s impact on household bills up to 2030, not taking into account the fact that consumers are locked into a fixed price for electricity from Hinkley Point C until long after 2030 even if other technologies become better value.19 Furthermore, the Department did not consider whether the increase in the expected value of consumer top-up payments would be affordable for bill payers or within its mechanism—the levy control framework–for capping the cost of policies that impact on bills.20

9.We asked the Department what would have caused it to conclude that the deal was too expensive for consumers. The Department said that it had not considered setting a ceilng on top-up payments above which the deal would no longer be deemed value for money.21 It told us that its modelling showed the impact on bills would have been even higher, between £21 and £24 more a year, if low-carbon alternatives such as wind and solar replaced Hinkley Point C, although this modelling does not incorporate the most recent falls in the cost of offshore wind.22 The Department added that the structure of the contract means that increases in top-up payments are offset by reductions in wholesale prices and protects consumers from price fluctuations.23 It also said that more vulnerable consumers receive different kinds of relief through schemes designed to alleviate the effects of fuel poverty, such as the Warm Home Discount.24

10.HM Treasury told us it was very focused on the cost to consumers of energy policies and that it had brought forward the levy control framework mechanism to constrain consumers’ costs.25 It reviewed the deal at various points during negotiations, but its emphasis was on the risk of the deal ending up on the government’s balance sheet.26 It was also concerned about the legal, reputational, investor and diplomatic remaifications of not proceeding.27 HM Treasury told us that it considered the way the Department tested the value for money of the deal for consumers to be robust.28

Risk allocation and financing

11.The deal to support Hinkley Point C is expensive partly because NNBG is bearing all the construction risks. NNBG is paying for the power station upfront and will not recoup its expenditure until it is generating electricity, meaning it is liable if construction costs overrun or the project is delayed. If the government supported Hinkley Point C differently it could have resulted in lower costs to consumers over the life of the project. For example, paying for some of the project upfront could have reduced financing costs because the government’s borrowing cost is lower than for private investors. Similarly, the investors’ required rate of return could have been lower if the government shared some of the construction risks.29 For example, the National Audit Office estimated that, if the government had taken a 25% equity share in a public-private partnership type deal for Hinkley Point C, then the strike price for electricity from the power station would have been in the range £69.50–£76.00/MWh (2012 prices).30

12.The Department and HM Treasury told us that policy constraints dictated the structure of the deal from the outset of negiotiations. The then Coalition Government’s policy was that the project should be privately financed, with no public subsidy, with taxpayers and consumers protected from the risk of cost increases during construction.31 Given this direction, the Department and HM Treasury did not assess alternative approaches to financing the deal or show ministers the cost implications of those alternatives.32

13.The Department also told us there were significant benefits of its approach. Alternative approaches may have raised the possibility that Hinkley Point C would be brought onto the government’s balance sheet, which could require trade-offs against other government spending priorities to stay within its fiscal constraints.33 The Department told us the recent increase in the expected costs to build Hinkley Point C demonstrated the benefit of its chosen approach as taxpayers and consumers are protected from the increase.34 However, the Department also confirmed that it was unlikely to use the same financing model to support nuclear power in the future. This is because of new information about the costs of low-carbon alternatives and the potential for greater competition between developers of nuclear projects in securing government support.35

1 C&AG’s Report, Hinkley Point C, Session 2017–19, HC 40, 23 June 2017

2 Qq 1, 14; C&AG’s Report, paras 1–3

3 C&AG’s Report, Key facts and paras 14 and 2.22

5 Q 1; C&AG’s Report, paras 1 and 2.29

6 C&AG’s Report, paras 1, 3, 1.14

7 Department for Business, Enterprise & Regulatory Reform, Meeting the energy challenge: A White Paper on Nuclear Power, January 2008

8 Qq 16, 19, 45

9 C&AG’s Report, para 1.10 and Figure 3.

10 Qq 14, 44; C&AG’s Report, paras 7, and 1.9 to 1.12

11 Qq 1, 39; C&AG’s Report, paras 14, and 2.22

12 Q 15

13 Qq 14, 26, 53–54; C&AG’s Report Key facts, and para 2.34

14 Q 15

15 Qq 14, 16, 54

16 Qq 115–118

17 Qq 1, 42; C&AG’s Report, Key facts and paras 13, 14 and 2.22

18 Q 39

19 Qq 42–43; C&AG’s Report, paras 13, 2.16

20 Q 35; C&AG’s Report, paras 2.18 to 2.20

21 Qq 40–42

22 Q 43

23 Q 39

24 Q 61

25 Q 35

26 Qq 11, 36, 111; C&AG’s Report, paras 16, 26 and 2.24; Figure 11

27 C&AG’s Report, paras 16, 26, and 2.31–2.33; and Figure 11

28 Q 18

29 C&AG’s Report, paras 9, and 1.16 to 1.19

30 C&AG’s Report, Appendix Four, Figure 19

31 Qq 11, 12, 34

32 Q 34

33 Qq 11, 34, C&AG’s Report, paras 1.18 and 3.6

34 Q 38

35 Qq 66–67

20 November 2017