Get rich quick- how to get free money in 2013

We were going to get a final decision to go ahead with the two new nuclear reactors at Hinkley point from EDF ‘before the end of the year’ and here we are in 2013 and there isn’t one. In fact, the decision is now rostered for ‘the earliest possible date’ amid talk (admittedly in the Mail on Sunday just before Christmas here) that the delay in the decision is to do with ‘cutbacks at EDF’s parent energy company in France’ and ‘issues negotiating agreement with the British Government over price guarantees’.

Well, it’s true: there are big problems with financial overstretch at EDF and the ‘transparent’ negotiations on strike price with the British government may be getting a little tricky.  But is that all, I wonder? I mean, if you were a financially overstretched company contemplating whether to pour billions into a new long-term investment in the UK that would pay for years, might you not think about sweating your existing assets a bit harder instead? Here, for example is what the august Institute of Mechanical Engineers has to say about such a strategy:

For an energy utility company, reactor plant life extension is much more economically attractive compared with the financial risk of new nuclear build.  The older reactor is highly cash-generative because interest from its construction debt is already paid-off, whereas new nuclear build reactors do not become significantly profitable until after they have reached their 17 year capital payback period.

Plant life extension is also attractive for government energy policy, because it buys extra time for investment in low carbon technologies and maximises the UK’s carbon emission savings from nuclear electricity generation. However the downside is that reactor lifetime extensions may ultimately delay the introduction of new nuclear build, unless the extra profits are diverted to funding new reactor construction.

I think the IMechE might be set down as being a little prescient, because of course, this is exactly what EDF have done. Indeed, a little remarked announcement at the beginning of last month confirmed life extensions of seven years to two of EDF’s existing nuclear reactors, at Hunterston and, yes, Hinckley Point so that, instead of closing as planned in 2016, they will run now until 2023. This is in addition to the five year extensions handed to EDF last year for two other plants.

So well done EDF for contributing to UK energy security by winning those extensions. (That is not intended to sound sarcastic – it really is a help to UK generating margins in the immediate term that these are happening). What they do, however, is far more helpful to EDF than even the Institute of Mechanical Engineers suggest. Yes, they will get the income from selling electricity from an already amortised plant for seven more years, but they will, as I have previously charted, get large sums of literally ’free money’ from operating into the 2020s. This is because nuclear power plants will not be subject to the Chancellors carbon tax – oops – ‘floor price’ – when it comes in in 2013. However, nuclear power will be sold subject to prices set by gas; the ‘market maker’ as far as those prices are concerned. Gas IS subject to carbon floor price and hence existing nuclear will gather free and without hindrance the full benefit of being able to charge post floor price levels for electricity without paying any of the price hike gained back in tax. Free money indeed (well, it‘s not free to us – the UK customers will cough it up…) – all you have to do is make sure someone turns up to keep the life extended turbines humming, which they do, according to latest energy statistics, about 55% of the time. So on this basis, what would the free money be worth? We can’t be completely accurate, of course, since the chancellor may raise the price he charges in the light of further instabilities in the EU carbon trading price, as he has already done once.  But working on what we know about the price over the period, and assuming the two power stations operate at about present levels, we can be fairly sure that each gains AT LEAST £13 billion of free money over the period covered by the life extensions. That’s in addition to the £9 billion per plant that will come EDF’s way from the extensions they were granted in 2011. Sooo…£44 billion on the balance sheet in addition to the money actually earned from producing electricity: not bad going when you’re a bit cash strapped and you’re not sure of the future. Oh, and, according to EDF there will be more life extensions to come as they review the rest of the present operating fleet.

And here comes the big question, then. If you’re getting this amount from your existing nuclear fleet for nothing, would you invest it all in new plant, or as the IMechE points out perhaps ‘delay’ the introduction of all that new risk?  I think we might be about to find out in 2013.