It’s been a week since Ed Davey announced the deal to build a new nuclear power station. After a week’s reflection the financing of this deal, especially by the Chinese, has become the biggest talking point. The cheapest way to generate electricity is with coal-fired power stations fuelled with open-cast coal from North America. Cheap, that is, if you ignore the environmental cost. Unless coal is handicapped by a carbon-tax, all low-carbon technologies will need subsidising. We don’t have a free market in energy in this country, we dare not or the carbon-reduction targets will be thrown out of the window. It has to be a rigged or contrived market in some form. However, there is a right way to go about it and a wrong way.
The cheapest way to fund a nuclear power station is for the government to borrow the money and fund it directly. This is what we used to do and other governments still do. Governments can borrow more cheaply than commercial sources of capital, and this reduces the building cost of the power station and hence the cost of the electricity. There is a second advantage in this approach – it keeps the money within the UK economy. By allowing the French and Chinese to invest in Hinckley Point C, not only is the power station more expensive than it needs to be but the profits, (estimated at £1bn annually) will be repatriated to France & China to the detriment of our already dire balance of payments.
So why don’t we fund it ourselves? The answer is not just that the government wants to get its borrowing down, it is pure misguided ideology. It is a simplistic Conservative belief that private investment is good and government investment is bad. It is one thing to borrow to pay revenue costs (a high road to economic disaster) but quite another to borrow to make a good investment. The government can borrow at about 3% and the return on the investment in Hinckley Point C has been estimated at about 10%.
After railing against the previous Labour government for its misuse of Private Finance Initiatives, we have done the same ourselves, for this is what this deal amounts to. It will leave a legacy for the next generation to pay over the odds for. It’s not that nuclear is so expensive – even at £92.5 per Megawatt-hour it is cheaper that wind, solar and most other renewables, it is the way it has been financed that causes the economic damage.
There was a program on TV recently about the Ottoman Empire, which got into debt to western banks and ultimately collapsed and defaulted, but not before its creditors had grown rich on the Ottoman’s debt. Do we want to find ourselves in a similar situation to the Ottomans one day and the politicians who have misgoverned this country these last few decades vilified by future generations?”
* Steve Coltman is parliamentary spokesperson for Loughborough and an Executive member of the Association of Liberal Democrat Engineers and Scientists although he writing here in a personal capacity.
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12 Comments
Get Fracking Cheaper and faster to do and clean up after and will supply cheap energy so whats the problem
As to Carbon Target our target way to ambitious and is outstripped by coal fired stations being built in far east china India etc so why should we pay higher cost when our piddling cuts on a global setting wont make a jot
Technical (and pedantic) point – it is not necessarily the case that Governments can borrow more cheaply than commercial sources – as an example, most Investment Grade pan-European Companies (i.e. Siemens) can borrow more cheaply than the governments of Greece, Portugal, Ireland, Spain and Italy at the moment.
Well said Steve. This is about ideology, and not about finance or the best use of resources. Energy security is a key strategic interest for the country, and the government should take the lead in making sure we have the right capacity at the right cost.
Steve, a good article and I like the warning about the UK possibly going down the route of the Ottoman’s empire with our current investment strategy. I think there are geopolitical reasons for choosing overseas equity rather than UK government bond financing, but the difference between the cost of capital for these two is so great that I don’t think it makes up the difference. I understand we have signed up for energy market privatisation and maybe a decision needed to be made quickly, but I think we definitely need to review our capital raising policy sometime soon.
“the return on the investment in Hinckley Point C has been estimated at about 10%.”
Historically, the true calculation of the return on any Nuclear Power issue in the UK has been:
“Think of a number. Double it….. Double it again….. Take away the price of a packet of crisps…… Double it again……
While there has been a degree of naivety about some of these cock-ups it cannot be escaped that there have been serious and deliberate deceptions emanating from government and/or the industry over the past 50 years or so, not least the pretence that the original Windscale and Chapelcross stations were in any way anything than a convenient ‘cover’ for nuclear weapon production.
It is unfortunate that most of the true economics of considering the cost of looking after/treating nuclear waste which will last longer than thinking humans have been around on the planet so far is mostly guesswork dressed up with a bit of statistical treatment. As is the question of whether Fukishima-type events or all sorts of other disasters will occur at this rate or that rate or another rate and cost this, that or the other price to put right (if at all possible), is as a result of miscalculation, lack of intellectual rigour or a bit of both.
One reason why the Hinckley Point investment is being funded externally is that in the Coalition Agreement we agreed not to have direct subsisidy for new nuclear. This was a compromise between the Tory position (nuclear OK, subsidy OK) and LibDem policy at the time of no nuclear. The argument at the time (still arguably valid) was that nuclear power stations were incredibly expensive and risky – costs always tended to overrun – and that there were better uses of public money when public money was scarce.
Whether or not the arrangement amounts to indirect subsidy (via the strike price) is a debatable point. We don’t know the cost of energy in 20-30 years time. But we can say that the strike price is comparable to renewable investments. And that the deal has been struck such that if prices go much higher (and the upside to the investors likewise) the public gets to recoup some of the benefit.
All in all a rather good deal, I think.
@Julian Tisi
If nuclear is likely to overrun, then surely there will be political pressure to jump in and save the private company, in order to provide the much-needed power. How can this be regarded as a good deal?
Totally agree. We need the power (370 TWh/year of it) and we need the lower emissions of nuclear. We also need some sovereignty, which is more important for our power generation than it is for our currency. The UK government should fund the project but not build or operate it. The French have got it right !
Excellent article! However, I would say it is not quite so easy for government to get out its chequebook when it already has such high levels of debt and a continuing budget deficit that is making it worse until about 2017. It would be easier to make the case for big government investment in a few years time, and then it could be right that the arguments divide or more ideological grounds.
Given the success of the Coalition’s policy to re-establish confidence in the UK’s ability to manage its debt, it is perhaps too easy to take this for granted, and to forget the difficult choices between fiscal credibility and how to spend the money we don’t have.
Julian Tisi,
“One reason why the Hinckley Point investment is being funded externally is that in the Coalition Agreement we agreed not to have direct subsidy for new nuclear. This was a compromise between the Tory position … and LibDem policy”
OK, you’ve convinced me. We put politics first when taking a business decision. In other words, we fouled up.
Excellent post. The economics of big infrastructure projects with long build times are highly sensitive to the cost of capital. AFAIK we don’t know what this is for Hinkley Point but we can be sure that it’s a lot higher for this PFI-style approach than if the government had just funded it directly and this is bound to impact the wholesale price of power substantially. T
The first of this reactor design (EPR) being built at Flamanville in Normandy has gone horribly over budget because of design changes resulting from the experience of Fukushima but even so is *only* expected to cost $8.5 bn. Subsequent builds of the same design should be massively less and are being built in China at a reported cost of $3.8 bn each. Not all the extra cost of Hinkley Point is down to the cost of capital but the bottom line is that we will be paying a lot more – perhaps around double – for electricity than our competitors in ten years’ time thanks to this deal.