British parliamentarians request clarity on Hinkley deal

British parliamentarians have asked the Secretary of State for Business, Energy and Industrial Strategy (BEIS) to clarify some of the financial aspects of the government's agreement with EDF and its partner China General Nuclear (CGN) to build the Hinkley Point C nuclear power plant. Specifically, they want to know whether the £2.0 billion ($2.4 billion) government guarantee still stands, why the government's estimate of future top-up payments through the contract-for-difference (CfD) varies so widely with that of the National Audit Office, and whether the index to which the strike price is linked could be changed.

Greg Clark was appointed as the head of BEIS in July last year when Theresa May became the new British prime minister. Other changes when May took office included the creation of BEIS, which replaced the Department of Energy and Climate Change (DECC).

May ordered a review of the deal agreed by the government under her predecessor David Cameron. On 15 September, the new government announced its approval for the construction of two EPR reactors at the site in Somerset after reaching a new agreement in principle with EDF. Clark signed the final agreements enabling construction of the Hinkley units on 29 September, along with EDF chairman and CEO Jean-Bernard Levy and CGN chairman He Yu.

Clark gave evidence yesterday to the House of Lords Economic Affairs Committee for its inquiry into 'The Economics of UK Energy Policy'. Clark was accompanied by Jeremy Pocklington, BEIS' director general of energy and security.

Guarantee

In September 2015, the previous government announced up to £2 billion in support for the project, which was covered by the European Commission's state aid approval granted the previous year. The guarantee was provided by a unit within the Treasury, Infrastructure UK, which is now part of the Infrastructure and Projects Authority.

The Commission found that the guarantee and the CfD element of the agreement that EDF negotiated in 2013, constitute an appropriate and proportionate way for the UK to meet its need for secure, low-carbon energy.

Asked about the guarantee - the "financial underwriting" of the project - Clark said: "The original case involved a Treasury guarantee of £2 billion, which was part of the state aid approval of this. In the final terms that we agreed with the contractor, with EDF in particular on this, we agreed with them that they would not avail themselves of that guarantee." EDF wrote to the minister giving that assurance, he added.

Pressed by the committee to explain what would happen to that assurance in the event that EDF "goes bust", Clark said: "The agreement requires volition of both sides to come into effect. We had approval for [the guarantee], but agreed with [EDF] not to make it live. That could only change by agreement."

Pocklington added: "The formal language used is that they have no present intention."

Discount rate

According to the CfD agreed for Hinkley, if wholesale electricity prices rise above an agreed strike price, payments from the generator will be returned to consumers. If they fall below this price, the generator will receive a top-up payment. Customers pay nothing until the power plant is operational. The strike price for Hinkley Point C remains set at £92.50/MWh or £89.50/MWh if the planned new nuclear power plant at Sizewell goes ahead. These figures are in 2012 prices.

The government's CfDs fix the cost to consumers of the power from new generating sources, regardless of the market price. The Hinkley contract will last for 35 years, the strike price is fully indexed to inflation through the Consumer Price Index (CPI) and the project will be protected from certain changes in law.

Asked about the link between the CfD for Hinkley and the CPI, rather than the retail price index (RPI) - specifically, whether the index could "move down in the event of negative inflation, as well as up at a time of rising inflation" - Pocklington said he would need to "double check". He said he would also come back to the committee on whether the index used could be changed from the CPI to another index. "In the past with the change from RPI to CPI, a lot of contracts continued to be linked to RPI," he added.

Both the CPI and RPI measure inflation, but the former measures changes in the price level of the market basket of consumer goods and services purchased by households, while the latter measures the change in the cost of a representative sample of retail goods and services.

Pocklington was previously director general of the Markets and Infrastructure Group at DECC. Before joining DECC, he was director of the Enterprise and Growth Unit at HM Treasury.

Top-up payments

The committee also asked about the large difference between the government and the National Audit Office (NAO) in their respective estimates of future top-up payments through the CfD for Hinkley Point C.

The NAO scrutinises public spending for Parliament. Its public audit perspective helps Parliament hold government to account and improve public services.

In its July 2016 report Nuclear Power in the UK, the NAO said these projected top-up payments had increased from £6.1 billion to £29.7 billion since DECC and EDF agreed the strike price in 2013.

On the question of why the NAO and DECC used "different discount rates", Pocklington referred to the Green Book, which is HM Treasury guidance for public sector bodies on how to appraise proposals before committing funds to a policy, program or project.

"Our estimate, which has a low and high range of £11 and £21 billion for the top-up payments uses the social discount rate as required in the Green Book, which is the standard government methodology for assessing the costs and benefits of projects," he said. "As I understand it, it is the better way to evaluate the economic case for the project. The National Audit Office were using a different discount rate based on the cost of borrowing, which is an accounting tool. The NAO's number, which is not a government number, was £30 billion. They are different numbers for different purposes."

Asked whether the Treasury's discount rate had proved to be correct, he said: "That's the better number to use for an economic assessment of a project that's consistent with the Green Book."

Controversy

The government has "established a process" of regular meetings about the Hinkley project and is closely monitoring EDF's execution of the contract, Clark and Pocklington told the committee.

On the controversy surrounding the project following the resignation of EDF's finance director in March last year - Thomas Piquemal stepped down because he claimed Hinkley could jeopardise the company's financial position - Clark said: "It has been the subject of controversy in France; some of the members of the board, including the finance director, didn't agree with it, but nevertheless the board approved it and that was the basis upon which they decided to make the investment ... With any contract like this we would have a close involvement in the scrutiny of the execution of the contract."

Pocklington added: "We have established a process of formal quarterly meetings looking specifically at the Hinkley project and involving all the key people in government, in the Department, in the Treasury, in the Infrastructure and Projects Authority in the cabinet office. And we meet quarterly with [EDF Energy's new build subsidiary] NNB Generation Company, and will have a regular series of meetings as well with EDF, including a meeting with the Secretary of State once a year at least with the chairman of EDF."

Asked about the "technical issues" of the project, Clark said: "It's for the parties to the contract to deliver it, but of course they're in constant communication and there is nothing that has arisen that gives us any reason to suppose that it's not on track." He also stressed that the construction risk lies with the developers and that no payment is made unless and until the plant starts generating electricity.

He refuted the suggestion of the country "being left with a half-built power station".

"The approval was made on the basis of due diligence that made us content that there was every prospect of it being delivered, so that is not what we anticipate remotely. The second thing is that the construction risk is entirely with the promoters of it and that was deliberately entered into. There is nothing we are aware of that would indicate what we agreed to is not proceeding."

Researched and written
by World Nuclear News