Getting customers to pay for new nuclear upfront

Financial Times 21st November 2018

EDF is pushing a plan to finance nuclear investment in Britain that it claims would cut the cost of power from new reactors to levels competitive with gas and renewable energy. The French state-backed power utility wants to use a technique commonly used in utilities such as water, airports and power distribution. This allows companies to charge customers upfront for new infrastructure. It is being used in the £4.2bn project to build a "super sewer" under London's river Thames.

But the mechanism has never been tried for a project as technically complicated and lengthy as a nuclear power station, which can take a decade to build. This and other challenges mean any gains are not assured. With capital-intensive, long-life assets such as sewers and power transmission networks, financing represents a substantial chunk of the overall cost that needs to be recovered. Charging upfront reduces this by avoiding the need to roll up interest during the construction phase, thus cutting the amount of compounded debt to be serviced and paid off during the life of the asset.

"Given that financing alone represents roughly two-thirds of the lifetime costs of building and operating a nuclear power station, it is actually a much better deal for consumers," said Humphrey Cadoux Hudson, managing director of nuclear development at EDF Energy, the group's UK subsidiary. "They get to buy electricity at far cheaper cost." EdeF's proposal comes at a time when Britain's much touted nuclear renaissance is in danger of shorting out. The first deal - which will see the French group and its Chinese partners build a £20bn station at Hinkley Point in Somerset - was struck in 2016 at a guaranteed strike price of £92.50 per megawatt hour (MWh) in 2012 prices, indexed for 35 years and worth about £105 in current terms. Heavily criticised for being excessive, it was at least similar in headline terms to the prices required for renewables, nuclear's main zero carbon competitor.

However, renewable costs have since fallen sharply, with some deals for offshore wind farms being signed for as little as £55-60 per MWh with 15 year contracts. These are not strictly comparable; renewables generate intermittent power that requires costly back-up whereas nuclear produces consistent base load electricity. But observers agree the price gap presents a problem. Concerns about the attractiveness of nuclear investment in the UK were highlighted earlier this month, when Toshiba of Japan chose to liquidate its investment in the Moorside site in Cumbria rather than continue, having been unable to secure a buyer for the scheme.
The government has been forced to consider a direct equity injection into another project, at Wylfa in Wales, to keep that scheme on track.



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