The knowns, the unknowns and that fabulous nuclear contract (with apologies to Donald Rumsfeld)


We know both are Donald...

We know both are Donald…

How can we characterise the much trumpeted ‘deal’ on Hinkley C now that it has (unlike poor Tian Tian’s baby) actually emerged?  Well it’s not much of a deal I guess, more a kind of semi crayoned-in statement of intent and a very expensive one at that.  The bit we do know is that if all the bits that aren’t yet crayoned in (e.g. all that stuff about state aid approval) are in the fullness of time, then we’re stuck with an upwardly indexable ‘Contract for Difference’ payment of £89.50 per mwh. Or if EDF don’t build any more reactors, a payment of £92.50 for, er, 35 years.   A deal where you get more payouts if you don’t deliver anything else than if you do is a new one to me but there you go.

At the moment there seem to be a lot more things that we don’t know than things we do know about this deal. Like, for example, exactly what form the contract to enable financial closure will look like. We do know that  ‘the government is in negotiations with NNB Genco ( a subsidiary of EDF) about a potential investment contract which might enable [their] final investment decision on the Hinkley C new nuclear power plant project’ because it says so on p.58 of the recent Electricity Market Reform: Proposals for Implementation document.

Perhaps we should turn to the Energy Bill (part 4, to be exact) to find out more about this contract. Well it will almost certainly be one of the special ‘varied’ investment contracts that the government is proposing to offer so that very large projects thinking of financial closure before CfDs come on line can get the certainty they need. The advantage of this kind of contract can be seen in the name; you can vary the terms (i.e. the strike price) subsequently if you’ve agreed to do so when you sign it. You also don’t need to tell anyone what you’ve agreed if it’s commercially confidential at the time. The amount we’re in for when the magic date of 2023 arrives could therefore be substantially higher than what we currently think we’re in for (that £92.50 for example).

So we don’t really know that then I suppose, but other things are a bit more certain, aren’t they? Like that 2023 date. Knowing that could be important, couldn’t it, because if you’ve signed an investment contract as an IOU for CfDs at a future date, it might be important to know when you can cash that IOU in. Important partly because it will be such an enormous amount of cash (this we do know).  Let’s say (kindly), that in its first year of operation as a new entrant, Hinkley C runs at about 80% capacity, then it will get, assuming a reasonable relationship between strike and reference price, about half of the £2.4 billion represented by strike price x output – just over a billion pounds.  That represents pretty much ALL the available CfDs for new entrants in any one year on the basis of the existing levy control framework. So if you are a renewable developer you might want avoid planning to start producing in 2023 because you won’t get a look in.

So do we know that for certain?  Well not really. Because it’s worth bearing in mind that EDF originally planned to start producing power at Hinkley C at the end of 2017 (and I’ve got the timeline chart they produced  in 2009 on my wall to remind me). Furthermore, the two other schemes they’re building in Europe are now either massively behind schedule, over budget or both.  So the point at which all those CfDs get hoovered up could be over a much longer timescale than we think. This might be a bit destabilising for everything else over that period.

But we do know they’ll have that investment contract in their pocket, don’t we, so it will be all right in the end, won’t it? Well…that depends on what we don’t know:  the terms for performance in the contract.  If it’s a standard CfD contract it will have a window in it to deal with reasonable variation in the project coming on stream and a longstop date, perhaps a year after the window closes. At the point of the longstop date you clearly can’t go on hanging around and hoping, so the contract is dissolved and that’s the end of you. We know this because it says it in the DECC Electricity Market Reform: Delivering UK Investment document that was issued this summer.

So we might reasonably assume that some sort of window and longstop arrangement will be in the varied investment contract once it’s signed. Ah but if there’s a serious prospect that EDF might lose their precious pile of CfDs because they’ve gone beyond the ‘longstop’ what then?  Well they might just not sign up in the first place. So the contract probably won’t even have the same sort of longstop in it as standard CfD contracts will, making it an even more unstable bomb under all other projects in the early 2020s than it is now.

Indeed, you might have to draw up what will look like a complete stand-alone contract, without the provisions likely to be set out in standard CfD contracts, to get the scheme away in the first place. But then won’t that look like special treatment for nuclear even more than an extra-lengthy, hyper-costly contract already does?  And won’t that be even more likely to trigger an adverse state aid rejoinder from the EU than is likely at present?  And that is where we were at when we started this piece.

So we don’t really know that much, do we? And what we do know is not a pretty sight.






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