NAO slams government over ‘risky’ and ‘expensive’ Hinkley project

The government’s deal to construct nuclear power station Hinkley Point C has locked the public into a ‘risky and expensive project with uncertain strategic and economic benefits’, according to National Audit Office (NAO) head Amyas Morse

The station’s planned construction – by EDF and China General Power Group – was implemented to manage the UK’s move away from carbon-based (fossil) fuels. However, the Department for Business has failed to sufficiently consider the costs and risks – the impact on consumer bills was estimated up to 2030, despite the cost of Hinkley running long afterwards.

The NAO said: ‘If the project runs into trouble, the government may need to fund alternatives to ensure secure supply, or come under pressure to renegotiate its deal. The department did not sufficiently appraise alternative ways to structure the deal.’

Delays to the project have exacerbated matters, while concerns have been voiced about top-up payments to account for contract for difference, which have increased it by £6bn to £30bn. This contract sets a price per megawatt-hour of electricity generated by the station, at £92.50 (in 2012 prices) for the next 35 years – and will receive top-up payments if the market price is lower. Payments will reverse if the market price is higher.

Key issued raised by the NAO include:

  • The financial case for nuclear power ‘deteriorating as construction costs have increased, and alternative low-carbon energy sources have become cheaper;
  • Alternative financing models should have been considered, which could have reduced the total project cost;
  • The government negotiated only with EDF, despite lower ‘strike prices’ being achieved in competitive tenders. However, the government had mitigated risk through its pricing and benchmarking mechanisms;
  • When the deal was finalised in 2016, value-for-money tests showed the economic case for Hinkley was ‘marginal’ and subject to significant uncertainty; and
  • Falling wholesale energy prices meant top-up payments to the contractors increased above what was expected.

‘The department’s overall case for [Hinkley] has weakened since it agreed key commercial terms on the deal in 2013,’ the NAO stated.

‘The expected future costs of most low-carbon alternatives to nuclear power have fallen more than expected. Delays have pushed back HPC’s expected construction schedule, reducing the case for paying a premium for it to be built before other nuclear power projects were able to compete for government support.’

The government has ‘increasingly emphasised’ Hinkley’s ‘unquantified’ strategic benefits, but it has ‘little control over these and no plan yet in place’ to realise them, the NAO added.

The department has estimated that Hinkley Point will place an extra £21-£24 on the average electricity bill, compared to up to £24 if Hinkley Point is delayed and replaced by low-carbon alternatives. It is expected that the power station will provide 7% of the UK’s electricity requirement from the mid-2020s, and help meet carbon dioxide emissions reduction of 80% by 2050.

‘The department has committed electricity consumers and taxpayers to a high cost and risky deal in a changing energy marketplace. Time will tell whether the deal represents value for money, but we cannot say the department has maximised the chances that it will be.’

Report by Kevin Reed

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