I was going to write about something completely different today, but hearing Robert Peston’s distinctive nasal tones on the radio made me change my mind. The UK Treasury has been negotiating for some time with EDF Energy about minimum electricity unit price it will get if it goes ahead with building a new nuclear power station at Hinckley Point in Somerset.
The deal is controversial because depending on the deal struck and the market price of electricity, customers may have surcharges added to their electricity bills for decades (EDF is reportedly asking for a 40-year contract for difference as it is known). How much of a surcharge depends on the terms of the deal. If unit prices rise above the “strike price”, generators have to pay back the difference. If they fall below, there’s a surcharge.
As far as private investors are concerned, such a deal is vital because without a guaranteed return on their investment, they won’t put up the billions needed for such projects. The question is not if this arrangement will be adopted across the board, but at what price.
Peston in his report and blogpost suggested that there was a “very real prospect” of the Treasury rejecting a deal because it would feel that customers would have to pay too inflated a price as a result of the contract for difference.
If so, this is curious, given that an identical principle underpins the offshore wind transmission licence system introduced by the previous Labour government and upheld by the current one. Under this, licence holders are promised a guaranteed payment which rises linked to inflation. They get the payments regardless of whether the power they are transmitting is needed or not, and, just like with new nuclear, consumers have to foot the bill. The Energy Bill will replace this with contracts for difference along the same lines as EDF Energy’s (which will also feature payments that are partly or wholly index-linked).
Basically I don’t see the Treasury walking out on this deal because it will send too negative a sign to the market. Besides, as Peston acknowledges, there will inevitably a price premium attached to this deal as the first of its kind. That’s the way in infrastructure finance.
Coincidentally (or not), MPs on the Energy and Climate Change Committee have come out today in favour of the principle of contracts for difference. Their report says:
“We support the introduction of Contracts for Difference as a way of reducing revenue and policy risk for nuclear new build projects. However, new nuclear should not be delivered if the price is too high… at the very least, the nuclear strike price should not be higher than that given to offshore wind, which is hoped to be around £100/MWh by 2020.”
N.B. This last line refers to prices agreed with offshore wind generators, not the transmission owners I mention above.
£100/MWh has already become a touchstone for value for money. When asked about a possible price of £140/MWh, EDF Energy chief executive Vincent de Rivaz told MPs that was “rubbish” but declined to comment on £100/MWh.
Price is one corner of the debate on paying for new nuclear. The other is who is ultimately liable for ensuring they get their money. Some investors have argued it should be the government; the Treasury, naturally trying to avoid adding a liability to its books, is resisting this. This will be governed by the Energy Bill, the content of which still hasn’t been finalised.