Indexing: the cuckoo pushes another fledgling out of the nest…

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The news that the UK Government has apparently agreed yet another wheelbarrow-full of money in underwriting to get  the one remaining near-term nuclear power plant prospect off the ground (here) might come as no surprise, but raises quite a few questions nevertheless.

The news is that DECC has, it seems, decided to ‘index’ whatever ‘strike price’ is agreed with EDF for the output of its proposed Hinkley C power station. We don’t know what ‘strike price’ will eventually be negotiated with EDF as a baseline for its power, but indexing, as Ronald Vetter, of CF partners points out (here) will increase the amount of our collective cheque to EDF for its power considerably. Vetter calculates that, on a strike price of £95 over 35 years, the unindexed cost of £86 billion rises dramatically to around £143 billion (assuming CPI of about 2% per annum over the period).

The questions are (in addition to why DECC or anyone else thinks it is a good idea to escalate its subsidy of nuclear to this extent):

  • If this is going to be standard for nuclear (I assume that any other parties coming for a strike price negotiation, if they do, will want the same), then why should large offshore wind generation not have the same facility afforded to it? After all, the sector will be looking for the same investment instruments from the Energy Bill. And CfDs and investment instruments are not a ‘subsidy’ for nuclear because they are also available for other low carbon energy sources aren’t they?  So if DECC does extend the ‘indexing’ principle to offshore wind, it will of course inflate the cost of CfDs considerably. However if the department doesn’t, it will surely expose them even more to ‘state aid’ enquiries from the EU. It must, surely, be sauce for both goose and gander, I would have thought. It will be interesting to find out whether this view is shared by those at the CfD helm.
  • On the assumption that there will be a levy control framework in place at the time nuclear comes on stream with this new arrangement, how will everyone else’s CfDs be managed?  The point of the levy control framework is that it places a cap on the amount of payments that can be allocated to both CfDs and continuing ROCs payments up to 2020 – about the time Hinkley C will supposedly come on stream.  I have been trying to clarify how much the present 2020-21 cap of £7.5 billion (present prices) works out in terms of money available for new entrants each year. I got a sort of an answer to this from DECC (here) when they told me that they calculate that about £1.1 billion will be available for new entrants in 2020-21. My own very rough figures, depending on what commitments will be undertaken in previous years, comes to a bit less at about £900 million, which I’ve posted about previously (here). If Hinkley C were to come on stream in 2018 (as was originally planned) then, by 2020-21, it would already have eaten up a lot of the money earmarked for new entrants, through the effect of its indexing. This would leave less in the coffers than potential entrants might be expecting, thereby making their plans to enter the market at that point very uncertain. The Levy Control mechanism only works if we know the total of existing forward commitments in relation to new money, and, importantly, that IT STAYS THE SAME.

The sort of good news is that, of course Hinckley C will not come on stream, I shouldn’t imagine, until the present term of the ‘levy control mechanism’ has expired. Which is a good thing, because otherwise it would wreck it.  But then there’s the question of whether a new control framework might be put into place to give some sort of certainty to low carbon energy investment from 2020 onwards.  I wouldn’t hold your breath on this one; the prospect of designing a control framework that can function while EDF is scooping an unspecified sum of ‘new entrant’ allocation off the table each year for 35 years will be, to say the least, dim.

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