In 2006, the British government launched a policy to build nuclear power reactors based on a claim that the power produced would be competitive with fossil fuel and would require no public subsidy. A decade later, it is not clear how many, if any, orders will be placed and the claims on costs and subsidies have proved false. Despite this failure to deliver, the policy is still being pursued with undiminished determination.

A recent paper by Stephen Thomas, University of Greenwich, argued that the most serious failure is with the civil service and its inability to provide politicians with high quality advice. It concluded that the failure was likely to be due to the unwillingness of politicians to listen to opinions that conflict with their beliefs and identified other weaknesses include the lack of energy expertise in the media, the unwillingness of the public to engage in the policy process and the impotence of Parliamentary Committees.

Whilst this could be considered a very Yes Minister state of affairs, the finance model that is now proposed is seen as a framework for other European countries to follow, so the success or otherwise of the British nuclear programme – and Hinkley in particular –  will have implications outside the UK. This blog builds upon the Stephen Thomas’s original paper.

From there to here….

UK government reviews of energy policy are infrequent, typically taking place no more than once a decade. So the announcement of a review in November 2005 two years after publication of the previous policy White Paper was surprising. What made the announcement more remarkable was the focus on reviving nuclear when only two years previously, the nuclear option had been rejected.

The White Paper claimed nuclear power would benefit from the fact that nuclear power plants do not emit carbon dioxide and its owners would not need an emissions permit. With a Carbon emissions permit price (in the European Union’s Emissions Trading Scheme (EUETS)) of €36/tCO2, it forecast nuclear power would be competitive under all its scenarios and that ‘in the central case and high cases for gas prices and a central case for nuclear costs, nuclear power provides economic benefit regardless of the carbon price’. The White Paper stated that the government would not be making any investment but that it would allow ‘energy companies the option of investing in new nuclear power stations

New Nuclear power station locations (Hinkley in the south west)
New Nuclear power station locations

The economic experience with nuclear power in the UK has been poor with high costs falling on the public. The key element that made the policy politically acceptable was a promise that no public subsidies would be offered. The Green Paper stated: ‘Any new nuclear power station would be proposed, developed, constructed and operated by the private sector who would also meet decommissioning and their full share of long-term waste management costs’. The implication was that new nuclear power plants would compete on equal terms in the market with other forms of generation.

Financing Hinkley – Contracts for difference

Utilities were expected to be unlikely to choose nuclear because of the risks inherent in a competitive electricity market. Financiers were concerned about two major risks: technology risk, the risk that the costs would be higher than forecast; and market risk, the risk that the electricity wholesale price would fall below the cost of generation of the nuclear plant. These risks had not been important to utilities while they were monopolies because they had generally been able to pass on to consumers whatever costs were incurred.

Market risk was clearly illustrated in 2002 when the operating cost alone of Britain’s nuclear power plants, was higher than the electricity market price and British Energy was effectively bankrupted

In February 2010 the Energy Minister, Ed Miliband, and the Office of Gas & Electricity Markets (OFGEM) announced that market-driven electricity system would not meet objectives in terms of reliability and greenhouse gas emissions. Of most relevance to the nuclear programme was the introduction of Contracts for Difference. These were said ‘to provide stable financial incentives to invest in all forms of low-carbon electricity generation’. In practice, these were simply fixed price contracts with part of the payment coming from the market at market price with the ‘difference’ between the market price and the contract price paid by a consumer subsidy.

The energy minister claimed in a statement to Parliament in October 2010 that the government was not offering subsidies to nuclear power. However, the statement appears contradictory:

“I should like to take the opportunity to reconfirm the Government’s policy that there will be no public subsidy for new nuclear power. To be clear, this means that there will be no levy, direct payment or market support for electricity supplied or capacity provided by a private sector new nuclear operator, unless similar support is also made available more widely to other types of generation”

It was not until October 2015 that the government acknowledged that ‘the no subsidies policy no longer applies

A strike price but still no deal to strike

The terms of the power purchase agreement for the reactors planned for Hinkley Point C announced in October 2013. The power purchase contract would cover 35 years, at a pre-determined price, the ‘strike price’, of £92.50/MWh (2012 prices) index-linked to inflation, outside the market and at levels more than double the wholesale market price for electricity that prevailed in 2013. This agreement was based on an assumption that each reactor would cost £8bn (in 2012 prices) four times the cost forecast by the government in 2008. Financing charges were expected to add about £4bn per reactor, and sovereign loan guarantees covering all the borrowing, expected to be about £17bn, were expected to be offered.

The October 2013 agreement was far from a final deal. The immediate hurdle was that it had to be examined by the European Commission competition authorities to determine whether the contract represented state aid that would distort the electricity market between member states. Despite an initial evaluation that was highly critical of the deal, on October 2014, the Commission published its verdict that the deal did not break European Union law.

In October 2015, revised terms were announced by EDF and the British government. It was asserted that the construction cost and the strike price were unchanged but the completion date had gone back to 2025 and there had been significant changes to the composition of the consortium. It was also announced that EDF would release its Bradwell site to a Chinese company, China General Nuclear (CGN) which is expected to be a minority stakeholder in Hinkley.

The October 2013 agreement stated it was expected to comprise EDF with 40–50%, the two Chinese companies, CGN and China National Nuclear Corporation (CNNC) with 30–40%, Areva, with 10% and investors with whom discussions had already taken place taking 15%. The October 2015 agreement inevitably saw Areva, which by then had financially collapsed, drop out, the 15% to be taken by other investors had not materialised leaving EDF with 66.5% and CGN with 33.5%. CNNC was not mentioned in the deal although subsequently it claimed it would still be an investor

EDF Share Price (2005-2016)
EDF Share Price (2005-2016)

Betting the house – EDF financing options start to dry up

In June 2013, Ed Davey, the Secretary of State for DECC announced that loan guarantees worth up to £10bn would be available to Hinkley. The common assumption then was that loan guarantees to cover all the debt were fully agreed, however, closer examination of the revealed there were conditions, particularly a ‘Base Case Condition’ which was that until Flamanville 3 was in commercial service, there would be a cap on the guaranteed loans effectively meaning funding would be primarily through equity.

The Base Case Condition had to be met by the end of 2020 or the loan guarantees would be withdrawn. There are increasing doubts that Flamanville 3 can meet this deadline.

The implication that loan guarantees were not as committed as had been commonly assumed was reinforced by EDF implying it would fund construction of Hinkley from equity (its own funds) rather than borrowing. It seems improbable that EDF would choose to do this if borrowing with loan guarantees was an option given its low profitability and the relatively high cost of equity compared to debt. In January 2016, the Telegraph reported:

“EDF had originally been expected to use project financing for Hinkley, backed up by up to £16bn in UK Government guarantees via Infrastructure UK. But Mr Lévy [EDF CEO] announced in October a “radical change” to what he said was a “more efficient” option of delivering its £12bn share of the project from EDF’s own balance sheet. It has since emerged the UK had attached a sub-investment grade BB+ credit rating to the project”

There was clear dissent within EDF over Hinkley with the resignation of the Chief Financial Officer, Thomas Piquemal, in March 2016 in protest at the deal while the union representatives on the Board were threatening to vote against the deal. EDF’s credit rating is in decline and Moody’s downgraded EDF in May 2016 partly because they had not accounted for the incremental risks associated with Hinkley Point C.

By mid-2016, it was unclear whether the Hinkley deal would go ahead with new barriers, such as the financial collapse of Areva, the quality control issues, the internal dissent within EDF and the barriers to loan guarantees appearing more rapidly than existing ones are overcome.

Party politics and withering on Whitehall

Nuclear power has generally not been a party political issue with the two main parties never anti-nuclear as a matter of principle. There have been concerns about costs and an awareness of the continuing failure of government policies towards nuclear power and the parties have always contained dissenting minorities. What is remarkable is how many of the key policy-makers appear to have either reversed their position on nuclear power or have at least shifted dramatically.

It might have been expected, given the poor record of public expenditure on nuclear power, the huge liabilities that had fallen on the public purse following the collapse of British Energy and BNFL and the major commitment of public money that a 35 year CfD and the loan guarantees represented that the Treasury would have concerns about a nuclear programme. However, there had been no sign of opposition from the three long-serving Chancellors of the Exchequer (the Chancellor is the minister in charge of the Treasury) since 1997 until the conditions on the loan guarantees appeared to tighten from 2014 onwards.

There seems no clear evidence that the nuclear programme was a product of a particular politician. Blair appeared to have a strong commitment to nuclear power, but given that the succeeding Brown and Cameron governments have pursued the nuclear policy with equal zeal, this does not seem to have been a decisive factor. Similarly, the ministers and advisors in the Blair and Brown governments were well disposed to nuclear power but again, their successors, even ones who had previously been anti-nuclear, have not been any less enthusiastic in their pursuit of nuclear power. The lack of opposition politics may have been important in the failure to challenge the suspect cost data that the programme was based on

Little Parliamentary push back or critical questioning on Hinkley?

Various Parliamentary committees should have provided critical analysis of the programme. The most regular scrutiny should have come from the Committee that monitors the energy ministry. Various reports were published. For example, in March 2013, the Energy & Climate Change Committee published a report. However, the report was equivocal and addressed mostly delays in the process rather than reviewing the underlying policy. The Chair of this Committee, Tim Yeo, was known to be a strong supporter of nuclear power while members of the Committee have been strong critics, so the lack of a clear voice is not surprising

Civil Service failures

Unlike its predecessor which was based on analysis by the part of the Cabinet Office, the Energy White Paper of 2006 was based on analysis carried out by the line ministry, DTI/BERR and was much more favourable to nuclear power. A public consultation was opened, as required by the 2003 White Paper as a condition to re-launch nuclear ordering. Greenpeace won a High Court decision that found that the consultation was flawed and the consultation had to repeated

The White Paper foresaw construction costs of £2bn per reactor and generation costs of as little as about £30/MWh, figures less than a third of those likely to be included in any contract to build Hinkley Point C. The government seemed to accept uncritically the assurances of the three consortia formed to build in the UK that they would go ahead without subsidies. In July 2008, soon after the publication of the White Paper, the government formed the Office for Nuclear Development (OND) within DECC and since then it appears to have operated as a promoter of nuclear power, apparently at arm’s length from the rest of DECC rather than the normal role of civil servants giving impartial advice to ministers.

The Treasury is often seen as the most powerful ministry and its public expenditure teams would be expected to have a policy view on the main policy issues which the Departments they shadow have to deal with and it can generally veto projects it considers to be an imprudent use of public money. However, it appears to have only got substantively involved late in the process when contract negotiations began, by which time it was too late to have an influence to question the fundamentals of the policy.

This is far from an isolated failure of policy towards nuclear power and over the past 50 years, it is hard to identify any government policy towards nuclear power that can be regarded as having been anything other than seriously misconceived. Further, there is strong evidence that British governments have made spectacularly bad decisions on large projects in general all too frequently. In 1976, Henderson gave a public lecture on two costly British-government sponsored errors, the AGR programme and the Concorde supersonic airliner. In 2013, King and Crewe (2013) wrote of the large number of costly failures mistakes made by government, while Flyvbjerg (2014) argues that mega-projects end up costing more with smaller benefits than forecast and almost always end up with costs exceeding the benefits. Any policy initiative to address the failings in civil service advice need to address these questions to understand whether the issues raised are specific or whether they are symptomatic of a general malaise in the UK policy process.

Hinkley promises and reality

The British nuclear power programme: promises and reality
What was promised What was agreed
1 No subsidies: would compete in the market on equal terms with all other sources Contract for 35 years. Government loan guarantees perhaps covering all the borrowing – about £17bn – of the expected (including finance) cost.
2 No ‘sweetheart deal’ No competitive procurement process
3 Competitive with other forms of generation generating at £31–44/MW h. Most expensive power on system at £92.5/MWh: more than double 2013 wholesale electricity cost
4 Construction cost excl. finance £2bn per reactor. Construction cost excl. finance £8bn per reactor
5 First power 2017 First power 2026
6 Consortium 80% EDF – 20% Centrica Consortium 66.5% EDF – 33.5% Chinese companies
7 Programme of 12 reactors by 2030 No more than a handful of reactors built by 2030
8 Competition between developers & technologies Bilateral negotiations with NNB GenCo+ EPR

UK finally approves Hinkley deal

The decision on investment was approved by EDF’s board in July, and was agreed in principle with China during the state visit by President Xi Jinping to the UK in October 2015. After initially stalling, on the 15th September 2016, the government finally gave the go ahead after imposing “significant new safeguards” for future projects.

They stated that following a comprehensive review of the Hinkley Point C project, and a revised agreement with EDF, the Government had decided to proceed. However, ministers stated that they will impose a new legal framework for future foreign investment in Britain’s critical infrastructure, which will include nuclear energy and apply after Hinkley.

The Chinese agreed to take a stake in Hinkley and at Sizewell in Suffolk on the understanding that the UK government would approve a Chinese-led and designed project at Bradwell in Essex, which has raised questions over national security. In a statement, the government said:

After Hinkley, the British Government will take a special share in all future nuclear new build projects. This will ensure that significant stakes cannot be sold without the Government’s knowledge or consent.”

The government has not altered the guaranteed payment of £92.50 per megawatt hour for electricity generated. Shadow energy minister, Barry Gardiner said it is “too high a price” and it should have been renegotiated. For EDF this results in a 9 per cent internal rate of return over 60 years, assuming that the construction goes as plans. Each six-month delay in construction will knock 20 basis points off the total return.

The returns also have the advantage of being fixed. This compares to EDF’s domestic market, which are being deregulated, leaving the company to sell an ever-increasing share of its electricity at market prices — today around £40 per megawatt hour.


Whilst Hinkley can now officially proceed, the risk remain significant and the long term outlook for Nuclear power in the UK has to questioned. It may well be that, as with the previous two attempts no more than one or two reactors will be built before the programme collapses under the weight of high costs and, perhaps, poor performance in controlling costs and construction time.

If this happens, the real damage will not so much be the wasteful expenditure of public money on a failed policy: this is regrettable but in the context of overall public expenditure and expenditure on the electricity industry, the costs are not calamitous. The real problem is the opportunity cost and the fact that, as for the past half a century, British governments have operated in the belief that nuclear power can solve our major energy policy issues whether they are security of supply, affordability or environmental performance. The result is that options that might have been deployed more cost-effectively and more reliably, like energy efficiency and renewables have been neglected.

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  1. The Hinkley Point decision: An analysis of the policy process; Stephen Thomas Energy Policy
    Volume 96, September 2016, Pages 421–431
  2. Sunday Times. Hitachi bets £700 m on nuclear Britain; Japanese reactor maker’s bid for Horizon consortium is boost for UK energy strategy, October 28, 2012.
  3. Department of Trade & Industry, 2003. Our energy future: creating a low carbon economy, Cm 5761, DTI, London. http://webarchive.nationalarchives.gov.uk/+/http:/www.berr.gov.uk/files/file10719.pdf (Accessed July 27, 2015).
  4. Department of Trade & Industry, 2006. The Energy Challenge, Cm 6887, DTI, London.https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/272376/6887.pdf.
  5. http://www.bbc.co.uk/news/business-37369786
  6. https://www.ft.com/content/78f1702a-79b7-11e6-97ae-647294649b28?ftcamp=published_links%2Frss%2Fcompanies_utilities%2Ffeed%2F%2Fproduct


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