Financial appraisal – Hinkley Point C – Twin EPRs

Introduction

Negotiations between DECC and EdF have agreed a suitable electricity “strike” price claimed to enable the operation of the new nuclear build to be profitable. The price will be maintained under a “contract-for-difference” with the “difference” funded by the non-nuclear generators or by default by the taxpayer. This appraisal attempts to define the level of the “strike” price to provide a profitable operation for the new nuclear sector.

The EdF Financial Report 2012 shows a net annual income of just €3.3 billion, which is inadequate to finance its post-Fukushima fleet augmentation programme, nor the UK new nuclear build from its balance sheet. Its borrowings of €24.4 billion, £4.4 billion, $6.4 billion and CHF1.4 billion are subject to an average interest rate of 5%.

Appraisal

Annual Generation

It is proposed to construct two 1.6 GW Areva EPRs.

Annual generation = 3,200 MW x 365 x 24 x 0.9 load factor = 25 MWh x 10⁶.

Annual revenue

The current wholesale rate is ca. £50/MWh which yields £1.25 billion. The capital charges are such that EdF finds this to be inadequate. DECC has promised transparency once a deal has been forged, but without the basic data some assumptions can be made.

Capital costs

The capital cost of the twin reactors is now published at £16 billion, but the items this covers are unknown. There may be additional costs as below.

Inflation

There will inevitably be rising materials and labour costs over the ten years construction period.

NLFAB requirements for decommissioning and waste management

The assessment of inputs into a “pension fund for retired reactors” requires complex analysis as the reactors’ operational life is claimed to be 60 years, so that the actual decommissioning and waste handling takes place from 2080 to 2100, while the sequestration of the waste endures through the 22^nd century. A sensible arrangement would be the placing of an upfront bond together with annual levy, not on MWh generated as proposed in the original White Paper as operational problems may reduce the generation.

Initial fuel charge

The twin reactors require 2 x 1000 tonnes (2000 tonnes) as U₃O₈ of natural uranium (containing 1700 tonnes uranium) to convert to its initial fuel charge in a three tier process of conversion to UF⁶, enrichment (950,000 SWU) and fuel fabrication to make 240 tonnes of uranium oxide fuel loaded into the two.

At current prices this costs $400,000 to produce, which is £280,000. The cost of natural uranium as U₃O₈ is $40/lb but when the fuel charge is needed it will be in 2024 and by then the demand which fell after Fukushima will have risen to cater for the new build in China and Russia. Urenco the enricher will by then be privatised and will want a commercial price at least double that current.

Fuel charging, testing and commissioning

For the first three years until the two EPRs are finally operating at full capacity, taking into account fuel costs, commissioning staff costs, around £0.5 billion as working capital should be incorporated in the “strike” price calculations.

National grid connection

The current national grid connection to Hinkley Point B will be inadequate for the twin EPRs, so as the capital costs will be met by the consumer (or by subsidy) an allowance needs to be made in the “strike” price to cater for interest on the capital outlay. However, National Grid estimates the cost as £740 million, but the cost of this is socialised across all users of the transmission system and not charged to the developer.

Capital sum

Until the actual figures are revealed by DECC it is assumed that the figure of £16 billion is comprehensive, but three annual expenditures of £0.5 billion are added for start-up working capital.

Financing charges

A financial premium of 10% and although EdF is paying an average of 5% for its borrowings, 3% interest charges are assumed, representing a 2% subsidy if from a “green” investment bank.

  3% financing

The “strike” price has to cover an initial interest charge of £730,000 and an amortisation of say over ten years of £2.5 billion a year.

Assessment of “strike” price

The current EdF-Energy fleet is running profitably with a wholesale electricity price of £50/MWh and the initial capital has been amortised. At this rate Hinkley Point C would earn £1.25 billion revenue, which would represent just its running costs. To this needs to be added £0.73 billion interest and amortisation costs of £2.5 billion. This totals £4.48 billion, say £4.5 billion.

With annual generation of 25 million MWh, the “strike” price is 4.5/0.025 = £180/MWh. The strike price for Hinkley Point C has been agreed at £92.5/MWh but guaranteed for 35 years.

Discussion

The above analysis is based on assumptions due to the lack of transparency by DECC. The figure of £16 billion may be comprehensive or it may mean that the additional costs described above have not been taken into account. The cost of the transmission lines needed to connect the plants to the national grid are excluded.

No account in the evaluation has been taken of inflation, which must be significant during the ten years of construction.

Nuclear power costs three times its fossil fuel competitors and the imposition of a realistic “strike” price on the consumers and taxpayers is unaffordable while fossil fuels are available. 

The electricity market is in decline due to efficiency savings and price rises. Businesses invest in capital plant with the assumption of rising markets for their products. Volume is needed to cover overheads and bring unit costs down. Utilities are fined if they fail to produce consumer savings by, for instance, funding loft insulation. This is no business environment for private capital and the assumption is it relies on the French and Chinese states for its provision.

It can be concluded that even with an artificially raised strike price, new nuclear cannot be funded by private capital and the reduction in electricity demand means that it is not needed. Whether foreign governments will be willing to finance projects in the UK with little prospects of an acceptable return on capital remains to be seen.

John Busby 22 October 2013