Comment – 27 June 2013

How the Lib Dems help EDF to fleece the taxpayer

The 2010 Liberal Democrat Manifesto promised to:

Reject a new generation of nuclear power stations; based on the evidence nuclear is a far more expensive way of reducing carbon emissions than promoting energy conservation and renewable energy.

Not satisfied with giving EDF Energy a potential nuclear windfall of up to £143bn over the next 35 years for its Hinkley Point C project, Liberal Democrats in the coalition Government now plan to remove most of the risk for potential investors in the £14bn project.

Chief Secretary to the Treasury, Liberal Democrat, Danny Alexander has announced that “…the proposed new nuclear power station at Hinkley Point C is eligible for a UK Guarantee.”

In a speech to the House of Commons, Alexander confirmed that the Government is prepared to guarantee £10bn of the expected £14bn cost of building two new reactors at the Somerset site. However, Alexander admitted that the long-running negotiations between the government and EDF over the level of the guaranteed or “strike price” electricity produced in the reactors can expect have not been resolved and no deal has yet been done.

The UK Guarantee scheme is basically a way for the Government to pass on its “hard-won fiscal credibility … to support the UK economy”. The idea is that it will kick start critical infrastructure projects that may have stalled because of adverse credit conditions. So the Hinkley Project should be able to borrow money from investors at a lower interest rate than would otherwise have been the case. According to European Community Competition Law this kind of loan guarantee does represent state aid, so, in theory, the Government should seek European Commission permission before going ahead with this scheme.

It is not surprising that investors want some sort of guarantee when EDF’s other nuclear project at Flamanville in Normandy was originally expected to cost €3.3 billion and be ready around 2012. Now it is expected to cost €8.5bn and won’t be ready until at least 2016. The other reactor of the same type being built in Europe at Olkiluoto in Finland was due to be completed in 2009, but is now not expected to be ready until 2016, with a similar increase in cost.

Another Liberal Democrat, Energy Secretary Ed Davey said at a press conference: “…the purposes of offering to EDF the opportunity to have one of the Treasury’s UK infrastructure guarantees is to help that project, but it’s actually separate from our negotiations on the strike price and I can’t give you a time for them. There is an intense negotiation with EDF on (Hinkley Point C) HPC and when we conclude – if we conclude – then we will publish a strike price with all the terms and conditions.”

Ed Davey is the man who, in June 2006, in a document called ‘Where will Blair hide his nuclear tax bombshell?‘ declared nuclear power to be unaffordable and unnecessary. He predicted that the Labour Government would attempt to hide the true cost of nuclear power by introducing some form of guaranteed market or price, through super-long term contracts. Little did we know at the time at this is what the Liberal Democrats would actually implement themselves in Government.

After the May 2010 General Election, the previous Energy Secretary, Liberal Democrat Chris Huhne, who had spent most of his life forcefully arguing against nuclear power and condemning it as a ‘tried, tested and failed technology which carries huge environmental and security risks’, agreed to allow the Tories to pass laws that make new nuclear construction possible “provided that they receive no public subsidy”.

The UK Guarantees scheme will cover construction risk for Hinkley Point, one of the main sticking points for investors on new nuclear schemes. Yet the Government continues to insist nothing it is offering to the nuclear industry represents a subsidy – because the guarantees will be offered at a commercial rate.

Tory Energy Minister Michael Fallon might insist that EDF does not have the Government “over a barrel”, over the strike price negotiations, but according to UBS analyst, Stephen Hunt EDF Energy is “very much in the driving seat in terms of having the stronger hand” in the talks with the UK government. He said the strike price for Hinkley Point C, which is expected to be about £95/MWh, if linked to the consumer price index (CPI), as some press reports have suggested, would be closer to £113/MWh by 2020.

Roland Vetter, analyst at CF Partners says a CPI-linked strike price will result in revenues to EDF of £143 billion over the expected 35 years of the contract, compared with £86 billion if the contract was not linked to inflation.

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Published: 27 June 2013