The UK government appears to have given up on nuclear power. Although simple arithmetic shows that EdF cannot afford to build the proposed new power station at Hinkley in Somerset without a guaranteed price of at least £100 per megawatt hour, the Treasury is refusing to move from a figure of £80. (Since this post was written on 17.02.13, the Guardian has reported that the UK government has moved part-way towards Edf's position) If it persists, the effect of the government’s policy will be to ensure that new nuclear power stations will never be built in Great Britain. Nuclear power requires subsidy. The huge cost overruns at the stations currently being built at Olkiluoto in Finland and Flamanville in France mean that the UK government has had to guarantee a high and permanent price for the electricity from nuclear. Without such a commitment the French power company EdF will not be able to find the capital to finance the €14bn required to build the two proposed reactors in Somerset. These power stations might produce about 6% of the UK’s requirements so the current stalemate has disastrous implications for plans to decarbonise electricity production.
The economics of nuclear power
A nuclear power station costs relatively little to run. The cost around the world’s existing plants is about £10 per megawatt hour (1p per kilowatt hour). Similarly, the price of uranium fuel is well known and averages about £5/MWh (0.5p per kilowatt hour). Waste disposal and the cost of dismantling the power station in fifty years’ time are less certain but are insignificant in the context of the total bill. The overwhelmingly important element in the production of nuclear power is the price for initially building the plant.
At present, the evidence is that the first new single nuclear power station will cost about £7bn. This is the UK currency equivalent of today’s estimates for completing the two nuclear power stations in development, one by EdF, in France and Finland. Future UK nuclear power stations might be less expensive but a reasonably conservative assumption is that the budget for Hinkley will be at least as great as at Flamanville in France.
These assumptions are all we need to make a simple financial model of EdF’s position. Put as baldly as possible, the company will invest £7bn over a construction period of about 7 years and then get back an annuity from the operating profit of the power station. EdF will be quite confident that the plant will operate 8,000 hours a year or about 90% of the time. Multiply the price of electricity by the power generating capacity of the power station (1,600 megawatts or 1.6 gigawatts) and by the number of operating hours a year and we can calculate the number of megawatt hours the new plant will produce each year. Deduct the costs of operating the plant and we have an estimate of the operating profit it produces. This is the profit that EdF needs to create each year to pay its shareholders and banks for the capital it has used to build the power station.
The cost of capital
In the language of finance, EdF need to earn the ‘cost of capital’ for the money used to build Hinkley. The part of EdF’s business that buys electricity (in France and other countries such as the UK) and then sells on homeowners and businesses is a simple and reliable business whose profitability doesn’t change much each year. This activity has a low cost of capital, perhaps not much more than 7% at the moment.
Building a new nuclear power station at a huge cost is a different matter entirely. EdF faces a range of potential events that will disrupt the flow of cash from the new plant. These include the possibility of cost overrun, major maintenance issues or enforced shut-down of the power station or even a change in corporate tax arrangements. The cost of capital for EdF’s UK nuclear business will be well over 10% and perhaps as high as 15%.
A simple spreadsheet enables us to estimate the return on the capital that EdF will generate at various levels of guaranteed price for its nuclear electricity. In the table below, I have estimated the return on capital averaged over the 50 years of the power station’s life.
|Guaranteed price for electricity per megawatt hour||Average return on capital|
If my figures are even approximately correct, EdF simply cannot afford to build Hinkley if the UK Treasury only allows a price guarantee of £80 a megawatt hour. Even £100 generates a return of less than 10%. The analysts at the Treasury will know these numbers, of course.
The implication is surely this: the Treasury doesn’t want the UK to have new nuclear power stations, or certainly not the EPR type offered by EdF. Its belief appears to be that electricity generated from gas will be cheaper (and without a high carbon tax this is almost certainly right). As a result it is putting impossible demands on EdF. The negotiations will break down, and the UK will probably fail to achieve even weak targets for decarbonisation of the electricity supply by 2030.
(19.02.13. Since this piece was written there have been some indications that the Treasury will move towards EdF’s position. Nevertheless, my guess is that the Hinkley Power stations will never get built because the capital markets will not support the investment required by EdF.
 This is the ‘internal rate of return’ of the EdF Hinkley Point project at various levels of guaranteed electricity price.