Hinkley Point C contract terms

08 October 2014

The European Commission's approval of agreements between EDF Group and the UK government to build Hinkley Point C demonstrates that they are "fair and balanced for investors and consumers now and for the long term," EDF Energy chief executive Vincent de Rivaz said. 

Those agreements are for a long-term contract for the electricity generated at the plant - two 1600 MWe Areva European Pressurised Reactor units - and for a guarantee for the project's debt.

"The Commission rigorously examined the costs of the project in detail, potential returns for investors and benefits for customers. The engagement with Brussels was thorough, demanding but constructive," de Rivaz said.

The Commission found that the long-term contract - contract for difference (CfD) - and the guarantee constitute an appropriate and proportionate way for the UK to meet its need for secure, low carbon energy, EDF Energy said. The Commission's decision leaves the key elements of last October's agreements unchanged whilst it has reinforced measures designed to share potential future benefits with customers, it said.

Strike price

If wholesale 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. If it does go ahead, there will be a payment from Sizewell C to Hinkley Point C equivalent to £3/MWh upon the final investment decision being taken with respect to Sizewell C reflecting the fact that the first-of-a-kind costs of EPR reactors are shared across the Hinkley Point C and Sizewell C sites.

The Hinkley Point C contract will last for 35 years, the strike price is fully indexed to inflation through the Consumer Price Index and the project will be protected from certain changes in law.

As proposed in October 2013, the CfD already contained a series of 'gainshare' mechanisms in which customers would benefit if the project construction costs or equity returns were more favourable than forecast. The Commission, the UK government and EDF have accepted reinforcement of those mechanisms in the package approved by the Commission today.

EDF Energy has also committed itself to electricity from the proposed power plant being sold at market price and recorded separately from the company's other electricity production.

And EDF has agreed that the fee for the government's proposed guarantee of project debt be paid at commercial rates. The agreed guarantee fee delivers the equity return required by investors.

The proposed Infrastructure Guarantee would be used to support 65% of total budgeted costs prior to operation. EU rules require that the costs of the Infrastructure Guarantee provided by the government will be paid for at a commercial rate.

In October last year, EDF said that the construction costs for the two nuclear power units at Hinkley Point, expressed in 2012 money, are expected to be £14 billion. In addition to the construction costs, the project and its partners will have incurred £2 billion of other costs before first operation. These include land purchases, achieving the different consents, construction of a spent fuel storage facility and preparing the 900-strong team that will run the plant. This means total costs to first operation are expected to be close to £16 billion, expressed in 2012 money. These figures have not changed, EDF Energy said.

Next steps

Approval by the European Commission is "another important milestone" for the Hinkley Point C project, EDF Energy said. As well as agreement between EDF and the UK government on key commercial terms, the company already has planning permission from the secretary of state for energy and climate change, nuclear site licences and the approval of the European Pressurized Reactor reactor design by the UK nuclear regulator.

The remaining steps require the conclusion of agreements with strategic and financial partners. In parallel the waste transfer contract arrangements must be approved by the European Commission and by the secretary of state as part of the Funded Decommissioning Program.

This means that, for the first time, the eventual decommissioning and waste management costs associated with Hinkley Point C will be paid by the generator at the time of generation. The cost of this Funded Decommissioning Program has already been taken into account in the strike price.

Subject to a final investment decision, commissioning of the first unit at Hinkley Point C is expected to be completed in 2023. The plant will be able to supply about 7% of the UK’s electricity needs.

Fair deal

The UK Nuclear Industry Association (NIA) said the Commission's decision showed that the agreement between EDF and the government was "a fair deal and a fair price."

"Put simply - the government has designed a market framework to transform the energy supply towards a low carbon and affordable system. This means all low carbon projects have a CfD and a strike price. The Hinkley price of £92.50/MWh should be compared with the offshore wind farm price of £155/MWh and £120/MWh for a large solar farm," NIA said.

Asked if other nuclear power developers will be able to ask for a £92.50 strike price for their projects, NIA said the potential strike prices will be the subject of comprehensive negotiations between the developer and government and the NIA would not be party to that. The Department of Energy and Climate Change (DECC) will also be involved "to strike the right balance between the interests of the consumer and the investor."

Some critics of the Hinkley Point C agreement argue that recent DECC figures have shown it expects the wholesale price of natural gas to fall considerably in the next decade, thus making the project seem more expensive than it is expected to be.

"The projections for the price of gas are ones frequently made by the government and often go up as well as down. Furthermore, government assesses against a range of fossil fuel price projections - they don't rely solely on a single forecast," NIA said.

In the absence of nuclear new build the UK would rely much more heavily on gas, it added, but since this would be imported, there would be implications for security of supply and cost. The UK received 27% of its electricity from gas in 2013.

The Commission has accepted that the CfD is key to incentivising investment in low carbon infrastructure, NIA said. Existing measures such as the carbon price floor or the Emissions Trading Scheme do not adequately meet the market failure which exists in the UK market, it said.

The strike price is twice the wholesale electricity price, but "if the Competition Commissioner believed the deal is contrary to EU law, he would not have approved [it]," NIA said.

"The UK needs a huge amount of investment in low carbon generation – not just nuclear. So the framework developed means a guaranteed price will be paid in order to attract these investors. It is interesting to note, that it is only new nuclear developments which have a deal to pay the government a percentage of their profits," it said.

Vital replacement

With 20% of the UK's electricity coming from nuclear power plants and most of these due to retire in the next 15 years or so, it is vital to replace it with low carbon energy source, NIA said. While renewables contribution to the energy mix is increasing, until it can provide constant power to the grid, nuclear will be needed.

EDF Energy has said that the Hinkley Point C project will provide a "massive boost" to jobs, skills and industrial capability in the UK. An estimated 25,000 workers will be involved in the project during construction with a peak of over 5600 workers on site at one time. During its 60 years of operation it will employ around 900 people.

Asked to what extent the UK supply chain will benefit from project, NIA said EDF had publically stated that about 57% of the construction value of contracts will go to British companies. The company has already held sessions with interested British companies and so they can understand what they need to do to become an EDF supplier.

China Premier Li Keqiang and British Prime Minister David Cameron in June signed a civil nuclear agreement, which DECC said "paves the way" for Chinese companies to invest in Hinkley Point C.

Asked whether foreign nations having a controlling stake in critical energy infrastructure in the UK was a cause for concern, NIA said participation in Hinkley Point C "is an important first step" into gaining experience of operating in the UK and working with its regulatory regime.

"The UK has a strong independent nuclear regulator and this regulatory regime would apply to all operators in the UK. These are not portable assets and cannot be removed," it said.

Subject to contract

DECC said all the terms of the project are subject to contract and the secretary of state deciding to make a direction under section 10 of the Energy Act 2013.

The government and EDF "continue to engage" on the full detail of the CfD and guarantee.

"Ultimately, a CfD would only be offered to the project company, NNB Generation Company Limited (NNBG), if the government considers the contract to be value for money and in line with our policy of not giving support to new nuclear unless similar support is also made available more widely to other types of generation," DECC said. "Any risks borne by HM Treasury by providing a Guarantee would be paid for by NNBG and at commercial rates." The UK Guarantees Scheme is open to all eligible infrastructure projects, including those in the renewable energy sector.

The key terms of the agreement would help ensure an appropriate allocation of risk, giving NNBG "enough certainty" to build the plant and helping to meet one of the government’' key objectives of achieving "decarbonisation of electricity supply at least cost," DECC said.

Those terms include arrangements whereby Hinkley Point C would be protected from being curtailed without appropriate compensation.

"If export of power from Hinkley Point C is curtailed by the operator of the national transmission system and NNBG receives less compensation than is available under current market arrangements it will be able to claim compensation for this difference in respect of any power it has sold on the Season Ahead [electricity] market," DECC said.

Protection would be provided for any increases in nuclear insurance costs as a result of withdrawal of government cover or in certain circumstances where market cover in the nuclear insurance market is no longer available. In certain circumstances, where Hinkley Point C is shut down due to insurance arrangements not being available, compensation will be provided for such shutdown.

NNBG will, subject to conditions, receive compensation in the event of a "political shut down" of Hinkley Point C (by either a UK, EU or international Competent Authority) other than for certain reasons including health, nuclear safety, security, environmental, nuclear transport or nuclear safeguards.

The arrangements for political and nuclear insurance related shutdown compensation include the right to transfer to government - and for government to call for the transfer to it of - the project company which owns Hinkley Point C. The compensation arrangements would be supported by an agreement between, amongst others, the secretary of state for DECC and the investors.

Researched and written
by World Nuclear News