The mysterious case of the £22 billion in the night

I asked a written Parliamentary Question about Hinkley C power station at the beginning of this month – or more specifically, a question about compensation clauses in investor agreements with EDF and other parties to the Hinkley C agreements. Here’s what I asked, and what was said in reply:

Q: ‘To ask the Secretary of State for Business, Energy and Industrial Strategy, what assessment he has made of the risk that the UK’s withdrawal from the European Atomic Energy Community would trigger compensation clauses in the investor agreement in relation to Hinkley Point C power station’

A: ‘We remain firmly committed to bringing forward the UK’s first new nuclear power plants in a generation.

The Hinkley Point C contracts make provision for compensation in certain defined circumstances. The details of when these apply are set out in the agreements.

The consequences of the intended withdrawal from the Euratom Treaty will be closely monitored and the department is in close consultation with the industry about its impacts.

The Government will continue to support Euratom and to ensure that the UK continues to meet its international safeguards, and nuclear non-proliferation obligations and support its thriving nuclear industry’.

Naturally, the answer provided did not really address the question, but there were some interesting asides: confirmation that there are provisions for compensation in Hinkley contracts – but no further indication of what they are and under what circumstances they might be activated.

So what is this all about then, and why did I ask the question in the way that it was formulated? It starts with a small entry in the National Audit Office’s recent report on Hinkley C power station. The headlines coming out of the report are about the circumstances under which the eye-watering underwriting that the project has received came about (in the way of Contract for Difference payments) and how it might have been different, but tucked away in the report is this aside:

‘Withdrawal from Euratom night be interpreted as a change in the law that could result in an adjustment to the terms of the HPC (Hinkley Point C) CfD, or an event that could trigger the compensation clause in the SoSIA. At the time of the decision to withdraw from Euratom, the Department had not performed any assessments of the effects of withdrawal or the risks arising from this decision.’

Hence the question; and the answer indicates that essentially, no, the Department hasn’t looked at the implications of Euratom withdrawal for Hinkley C agreements.

They might be well advised to do so, because looking at all the documents mentioned in passing in these exchanges, it looks quite alarming.

We know, first of all, about the apparent decision to leave Euratom – that is contained, remarkably, in the letter sent by the UK government to the EU commission informing them of the UK’s decision to trigger Article 50. Despite Euratom being a separate treaty, and requiring no action in parallel with anything issued about Article 50, the UK government has apparently decided that, because of the fact that Euratom’s dispute procedure is notionally governed by the European Court of Justice, leaving Euratrom should be put in, to be on the safe side. Whether Parliament at a later stage successfully rows back from this commitment is, for the time being, beside the point: right now the position appears to be that we have given notice that we are leaving Euratom contemporaneously with leaving the EU.

The other certainty we have is that there are in place binding agreements about liabilities arising from the construction and operation of Hinkley Point C power station. These cover a whole range of liabilities and circumstances, and are essentially designed to give some certainty to the construction and operation process; but also to the circumstances under which Hinkley C might not go ahead, or be stopped once it is operational.

The chief agreement here is the ‘SoSIA’ mentioned by the National Audit Office. This stands for the ‘Secretary of State Investor Agreement’ entered into between the (then) Department of Energy and Climate Change and a host of others, including EDF and the China Nuclear Power Corporation in September 2016 (here).

Nothing much about this agreement has, as far as I am aware, ever surfaced in Parliament, except for a ‘Departmental Minute’ that appeared a year earlier, in October 2015 (here). This minute, which starts with the disclaimer that,

‘It is normal practice, when a government department proposes to undertake a contingent liability or commitment for which there is no specific statutory authority which is significant in relation to the organisation’s… expenditure, for the Minister concerned to present a departmental Minute to parliament giving particulars of the liability created and explaining the circumstances

goes into some detail about contingent liabilities that are outstanding on Hinkley C.

This minute was virtually impossible to interrogate at the time: I tried to do so when it came out and really got nowhere. Important, I thought at the time though, because of what the Secretary of State said about the implications of the agreement she was about to sign, and subsequently did. Here is what she says in the minute about compensation in the event of a shutdown of Hinkley C

Under the SOSIA, in certain, highly unlikely, scenarios e.g. HMG permanently prevents the construction or operation of the facility or a reactor or where there is a political shut down of HPC by a UK, EU or international Competent Authority, payments could be up to around £22bn excluding non-decommissioning operational costs that may be incurred after any shutdown.  However, the liability to make payments under the SOSIA is almost entirely within the control of HMG.’

Alarming but unlikely, eh? Well… looking at the actual SoSIA agreement (and it is, I assure you, an absolutely impenetrable read) it doesn’t all look quite as unlikely as the minute suggests. Granted, the agreement does provide for compensation in the event, say, that the government decides, essentially politically, that Hinkley C is not a project they want to proceed with and wants to bale out: that is what is known in the agreement as a ‘Qualifying Effective Shutdown Event’. It may well be that this was the sequence of events that surrounded the decision by the incoming Conservative Government under Theresa May to pause the signing of Hinkley C CfD financial closure just as it was due to take place, with a Chinese delegation apparently stranded in the UK, having anticipated that they would witness a signing. Instead the whole thing was placed on pause whilst the Government reconsidered the position: perhaps summarised roughly as [Theresa May] ‘my God this is a turkey of a project, and will cost us a fortune. How can we get out of it? Let’s pause to think about it’ (a few days later…) [Advisors] ‘sorry PM, we’ve had a look at the agreement your Energy Secretary of State signed with these people and it looks like it will cost you £22 billion if you pull the plug – and you won’t get a power station either’.

But there is more in the agreement than this: what is defined in the agreement as a Qualifying Shutdown event includes (and I quote)

‘a Government Authority (a) applying, implementing or changing the Law which is in force from time to time (b) applying or exercising its powers in that way or (c) applying, implementing or changing policy or guidance which has effect from time to time’

…all of which sounds as if a Government deciding to change a ‘law… or policy or guidance’ where that change centrally affects the ability, in a number of ways, for the Hinkley C project to proceed smoothly could well be defined as a ‘Qualifying Shutdown event’ if they went through with it. This could well trigger the ability of the injured party to walk away with a large amount of compensation, perhaps, as the Secretary of State says, of up to £22 billion.

Nuclear reactor running shoes

But still unlikely, eh? Well, one could be forgiven, in the light of the many recent delays, cost rises, refinancing attempts and board meetings to give renewed backing to the Hinkley C project for thinking that certain elements of EDF and their backers may well have more than a thought passing across their collective brows… They may think that, after all, pursuing the building of Hinkley C until the bitter end could well bankrupt the company, especially in view of the almost terminal troubles they are encountering with sister reactor builds in Flamanville in France, and in Finland, and might a way not be found at some stage to pull out of the deal? Of course the Secretary of State Investor Agreement works both ways: they are effectively bound into the deal by the agreement; and if they walked away would be liable for all sorts of penalties.

And what if a magical get-out-of-jail card came along in the form of a stupid government action that allowed EDF and its backers to walk away from a project they continue to have serious doubts about, but on the basis of a rich reward (all their money back and more) for doing so? Might temptation present itself at the massive expense of the UK taxpayer?

I should say here that there is no fully formed indication that EDF are planning to do anything at the moment except continue to pour concrete and get the scheme under way. However, it is reasonable, I think, to point out that there has been a history of questions raised on the other side of the Channel about the progress of the scheme, in terms of the French regulator, EDF board and other actors and, of course, continuing questions about the progress being made on the aforementioned sister projects. It is therefore not beyond imagination to suggest that such an option might appeal under these circumstances.

Unlikely, I know, but perhaps not so remote a possibility as was originally envisaged when the SoSIA was first drawn up, well before a referendum was considered, and Euratom was just another of those things one did in Europe that made things work well across the Community and internationally. Now withdrawal from the EU and Euratom looks real, and the clauses recklessly entered into look rather luminous. I certainly think there ought to be some more urgent investigation of what this all means from the Government point of view, and it really is up to BEIS to get on with it, which is why I will be asking further questions to try and tease such an approach out. Or maybe they have, but they’re just not telling anyone, which would be rather in line with what has occurred so far in this whole process of ‘guaranteeing’ liabilities and agreements for getting Hinkley C over the line.

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