Hinkley Point C Contents

2Hinkley Point C’s risks and opportunities

Risks to energy security

14.There is a risk that delays to the project could lead to the government incurring additional costs. The current terms of the deal mean that Hinkley Point C’s developers are liable if costs overrun or the project is delayed.36 But there are previous examples of other big, complex UK infrastructure projects where more costs or risks have been onto consumers and taxpayers when they ran into trouble.37 This is more likely to happen on Hinkley Point C if the government is reliant on it to ensure there is a sufficient supply of electricity.38 The Department for Business Energy and Industrial Strategy (the Department) said it was confident that it could take any necessary actions to ensure energy security if there were delays to Hinkley Point C, primarily through its capacity market auctions. It also told us the structure of the deal gives NNB Generation Company (HPC) Limited (NNBG) very strong incentives to make sure it completes the project and starts producing electricity on time.39 HM Treasury said that it had not carried out contingency planning for any potential demands of the government for additional funds, adding that it was not committed to stepping in on this project.40

15.Notwithstanding the contract structure, there is a risk that Hinkley Point C’s completion could be subject to delays because of the unproven nature of its reactor technology. Hinkley Point C will compise two 1.6 gigawatt (GW) European Pressurised Water Reactors (EPRs). Other projects using EPR technology in France, Finland and China have seen significant cost and schedule overruns.41 The Department said that the EPR technology has been assessed as completely safe and totally viable by the Office for Nuclear Regulation. It also told us that it is not fundamentally different to the 277 other pressurised water reactors in operation around the world.42 The Department added that EDF had put significant effort into learning the lessons from the Flamanville project in France and it is confident that this will ensure Hinkley Point C will be available when needed in the second part of the 2020s.43

16.The UK’s exit from the European Union could pose additional risks to the project’s completion. As part of the UK’s decision to leave the EU, the UK government announced in January 2017 its intention to withdraw from Euratom, a pan-European atomic energy regulator.44 The Department told us it intends to make sure it maintains the nuclear safeguards regime currently operated by Euratom; and it has entered into talks with the International Atomic Energy Agency, in negotiation with Euratom themselves. The Department added that it does not anticipate the withdrawal from Euratom triggering a compensation clause in the Hinkley Point C contract, which could have left taxpayers paying for a nuclear power station that was never built.45 We also asked the Department whether it had assessed the number of people with nuclear engineering and science skills that are leaving the country as a result of the uncertainty caused by Brexit. The Department replied that it is not aware of any significant exodus.46

Government’s oversight

17.The government needs sufficient advanced warning that the project is delayed so that it can commission alternative ways of ensuring there is a sufficient supply of electricity. Some alternatives require advance notice to be put into operation–for instance it takes around four years to plan and build a gas-fired power station.47 Capacity market auctions are held annually, to procure capacity both one year and four years ahead. The four-years ahead capacity market auction in 2021 will therefore be critical.48 Even if the government knows sufficiently in advance of delays so that it can seek alternative sources of electricity, such short-term actions could prove to be costly in the long run if they result in unnecessary excess capacity once Hinkley Point C is built.49

18.The Department will rely on the the Low Carbon Contracts Company (LCCC) to oversee the project and provide warning of any delays. LCCC is a government company responsible for overseeing and managing the government’s contracts to support low-carbon projects.50 The Department told us that LCCC will receive very detailed operational and financial information; and has rights to further information, such as Board papers, that it considers materially relevant to the completion of the project and its financeability.The Department, in turn, will receive quarterly reports from LCCC.51

19.LCCC requires sufficient skills and capacity to manage the large and complex contract effectively. The Department assured us that it had taken steps to ensure that LCCC has the appropriate commercial, legal and technical resources it needs to properly monitor the Hinkley Point C contract, now and in the future.52 The Department has also encouraged LCCC to notify it if there are gaps and the LCCC needs more resources as part of its responsibilities.53 However, as this Committee has reported previously, government departments have often fallen down when it comes to effective contract management. For example, in its 2016 progress report on contract management across government, the Committee reported that departments’ assurance arrangements over contract and contractor performance were still lacking.54

Hinkley Point C’s wider benefits

20.The government has increasingly emphasised Hinkley Point C’s wider benefits as the value-for-money case weakened. In particular, it expects the project to create jobs, build the skills of the UK’s nuclear industry and provide opportunities for businesses in the UK. The government expects Hinkley Point C to create 25,000 jobs during construction and 900 permanent posts during operation.55 The Department told us that ensuring the UK has sufficient low-carbon electricity for many decades ahead was the most important consideration for proceeding with Hinkley Point C. However, job creation and contracts being placed with UK suppliers are additional side benefits.56

21.the Department does not currently have a plan for how to manage and track the realisation of the wider benefits of the project. It also does not know to what extent UK workers and companies will benefit from Hinkley Point C and the wider follow-on new nuclear programme.57 The Department told us that it chairs the Hinkley Strategic Delivery Forum, which comprises representatives from local authorities, local education institutions, local businesses and unions. The Forum provides the Department with information so it can track some of the benefits the project is achieving. For example, EDF’s estimate that around 64% of the project’s contracts by value would go to UK firms.58

22.The creation of the Department for Business, Energy & Industrial Strategy presents a clear opportunity to link the nuclear programme to the government’s industrial strategy to drive economic opportunities and growth. The energy sector, including nuclear power, has the potential to help rebalance the economy. The Department is now well placed to oversee what is needed in terms of the workforces and the requirements for training and skills. The Department told us as part of the its industrial strategy it was developing a number of sector deals, one of which it expects to be with the nuclear sector. The Department could not provide any details about the deal as it had not been announced yet.59

36 C&AG’s Report, paras 8, 25 and 1.15

37 Qq 7, 8–10, 22, 28; C&AG’s Report, paras 18, 20 and 3.3 to 3.6

38 Qq 24–25

39 Q 8

40 Qq 7–8, 25

41 Qq 7–8;C&AG’s Report, paras 18, 1.25, 3.3 and 3.4; Appendix Five

42 Qq 33 and 48

43 Qq 8, 33, 114

44 Q 1; C&AG’s Report, para 3.9

45 Qq 5–6

46 Qq 106–107

47 C&AG’s Report, para 3.17

48 Qq 8–10;

49 Q 47; C&AG’s Report, para 3.17

50 C&AG’s Report, paras 22 and 3.11

51 Q 17

52 Q 17

53 Qq 8, 17, 96

54 Committee of Public Accounts, Transforming contract management: progress review, Session 2015–16, HC 711, March 2016

55 Q 68;C&AG’s Report, paras 17, and 2.29 to 2.30

56 Q 73

57 Qq 72–79

58 Qq 69–70; C&AG’s Report para 2.29

59 Qq 79–83

20 November 2017