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The APPG on Energy Costs


 

13/09/16 - The Hinkley Point review, with Humphrey Cadoux-Hudson (Managing director, Nuclear new build, EDF Energy); Prof. Michael Grubb (Prof. of Int. Energy and Climate Change Policy, Inst. for Sustainable Resources, UCL); Mike Finnerty (Office for Nuclear Regulation)


 

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All Party Group on the Costs of Energy

 

13 September 2016

 

The Hinkley Point Review

 

This note has been compiled in accordance with the Chatham House Rule.

 

Chair: Lord Palmer

 

Parliamentary attendance: Lord Palmer, Lord Grantchester, Phil Boswell MP, Alan Brown MP, Matthew Pennycook MP.

 

Speakers:

 

Humphrey Cadoux-Hudson,  Managing Director, Nuclear New Build, EDF Energy)

 

Professor Michael Grubb, Professor of International Energy and Climate Change Policy, Inst. for Sustainable Resources, UCL

 

Mike Finnerty, Office for Nuclear Regulation

 

The following points were made by the speakers:

 

On 28 July 2016 the EDF board approved the final design for Hinkley Point, which was seen as a huge vote of confidence in both the project and the technology. Shortly afterwards, the UK Government announced that it would consider all aspects of the plan.

 

Much has been said about the cost to the taxpayer. It should be understood that no public funding is required until the construction risk is over and the plant is operational (planned for 2025), because EDF and the Chinese investors will provide funding until that point. The costs and risks attached to the construction are being shouldered by shareholders, not taxpayers.

 

The second important point is that the cost of energy from Hinkley Point is often compared to current wholesale prices and not future prices, and it is anyone’s guess as to what the wholesale price might be in 2025. EDF is confident that by then, Hinkley Point will be competitive against various scenarios, including gas. In addition, we expect the cost of new nuclear project costs to come down.

 

The value of battery storage has been much discussed, and EDF if not against that, with the announcement of 50 MW battery storage at West Burton, but it is difficult to see battery storage complementing wind and solar, providing the same service as baseload power stations on the same level of price, etc.

 

EDF is confident that what is being proposed is what is needed. We are also committed to investing in the latest technology, for example small modular reactors (SMRs) are believed to have great potential as a complement to large power stations, but we need to get on with replacing the power stations, and EDF is sure that nuclear has a significant role to play in the country’s future energy provision.

 

Question: What do you think the decision will be?

 

Answer: I think it will be the right decision for the country

 

 

A handout was distributed which contained the speaker’s letter to the Financial Times in August (supporting the decision to pause and review Hinkley Point) and a graph showing the impact of wind and solar power on load duration curves (showing how many hours a year each level of electricity output is required) over a five year period from 2011-2015.

 

The speaker focussed on the content of his FT letter, rather than on nuclear power in general or EDF. In 2008, he was a member of the UK Climate Change Committee which recommended that capability be developed for a new generation of nuclear stations. At that time, two reactors were already under construction with positive assessments of cost per unit in the region of 4 - 6 pence.

 

Hinkley Point is an enormous investment and commitment and, once operating, we would be facing 35 years of paying 9.25p per unit.

 

In recent years, the costs of renewable energies and battery storage has roughly halved. Wind power is a good example, for example we saw in a recent Dutch auction offshore wind came in at 7.5p per unit on a 15 year contract. With those kinds of costs, the total volume of committed funding would pay for considerably more kWhs of even one of the more expensive renewables.

 

It’s entirely appropriate that the Government should review this to see if it is still appropriate.

 

So much has changed in the past 8 years. Renewable energy has expanded so much that by 2020, it has been projected that renewables will supply 35% of energy. Referring to the graph on the handout, during the 2020s there will be little or no need for straightforward baseload power, especially at some points in the year. At some points in summer there will be as much solar, plus some wind, that the system can absorb, and certainly in spring and autumn there will be as much wind as needed. Obviously, that will pose a system challenge, and also at the opposite end, in terms of peak demand, for example at times when the wind is not running.

 

So for the purposes of this discussion it raises the question of what is the right kind of mix of other things? If already by the time Hinkley Point comes on stream, there’s a situation where it probably can’t be used 100% of the year, and in competition with other energy sources such as renewables which basically cost nothing to run, what does that do to the economics and value-for-money of Hinkley Point?

 

The speaker’s final remark, according to the National Grid Future Energy Scenario, we should reach that point comfortably by 2030: with three of their four scenarios indicating between 60-70 GW of renewable energy capacity.

 

The final point to stress is around contractual structure because what the system will need is the plant to be economic to run at less than 100% capacity, and to be able to flex up and down as required.

 

If Hinkley Point is 9.25p per unit, which is going to be more than almost any renewable going forward, and also maybe more than any future nuclear plants which will hopefully come in cheaper, then actually the incentive is to run the most subsidised thing in the system, because that is what gets paid the most. So we would have a situation on occasions where Hinkley Point is being run, and forcing cheaper sources off the system. That I think is a contractual issue that really must be looked at again.

 

There are mixed views in the nuclear community but the professor’s concern is around the economics and cost and he believes that it is quite right that the Government should pause and reflect on the plan.

 

 

The Office for Nuclear Regulation is responsible for regulation of nuclear safety and security across the UK. The new reactor programme is quite a new programme, set up in the light of the Government’s potential agenda with regard to new nuclear build. The fact that a separate programme for new reactors was set up demonstrates the level of commitment as one of the ONR’s priorities.

 

There are three stages in the programme:

 

1. Generic design assessment - developed in conjunction with the Environment Agency. At this stage the design of the reactor is assessed to see if it can be licensed in this country. At the end of the process a design acceptance confirmation is awarded.

 

2. Licensing of the Operating Organisation, in this case NNB GenCo, responsible for safety and security of the plant. 36 conditions, covering construction as well as operation, are attached to this approval.

 

3. Construction Activities - this builds on the generic design assessment with a number of hold points that have to be satisfied.

 

After that three-stage process, the case becomes an established operation, with inspection, monitoring, etc.  The ONR is an enabling regulator, with very good relationships with licensees, but is quite prepared to take regulatory action and hold licensees to account when necessary.

 

Questions and Comments

 

Question: On the assumption that the project goes ahead, when will Hinkley Point come on stream?

 

Answer: The focus is on 2025.

 

Question: Given the track record of the Finnish project and the problems that have occurred (late and over-budget) why would Hinkley Point be any different?

 

Answer: A huge amount of work has been done on the design and we have worked with the ONR to adapt the design to meet UK requirements. There is nothing new in the technology and the problems in Finland (and Flamanville in France) stemmed from a deficiency in the industry and ourselves in managing big projects. Much stronger project management, especially in engineering, is being put in place. Part of the process is to get external firms to benchmark what is needed to set ourselves up as the ‘strong, intelligent customer’, which is a requirement for good project management.

 

Question: EDF and the Chinese investors are taking the construction risk, but we are paying 9.25p per unit over 35 years. Presumably there is some build contingency built in to the lifecycle costs? So who truly carries the cost of risk in terms of construction?

 

Answer: We’ve put together an agreed ‘open book’ financial model with the Government and a huge number of different organisations. We have agreed a return for the project. As we go through the plant life there is an opportunity to share gains through an operating cost reset, and there a sharing with customers if construction costs are lower than the budgeted amount.

 

Question: In terms of the review and the channels of communication, is there any EDF involvement or is it just being done within the Civil Service?

 

Answer: EDF has had a strong focus on what we’re doing in the local communities e.g. the South West.

 

Because we’ve been through such a long negotiation process with the government, exploring all the financial side, all the project management side, the design and contract, there isn’t a huge need for EDF to explain very much. When we are asked for something, we supply it. The review is a good thing, and everything needs to be as open as possible, with everyone onside.

 

Question: With reference to the earlier comment about the Dutch wind farm, yesterday it was announced that a Danish wind farm won a contract at £50 per MWh, and approximately three months ago a renewables company announced solar power and battery storage with no subsidy. Renewables are cost-effective now because costs have come down so much. This is the world we are entering, like it or not, and I ask EDF if there is a clause that says NNB GenCo would be paid or not if there is a need for curtailment?

 

Answer: There is a clause but it’s not quite like that. What we want is for the way that the market is regulated now to continue in the future. In the case of curtailment today there needs to be discussion with the grid operator, very close to the real time, where the balancing issues are aired. The Grid chooses the plant to curtail depending upon bids made by the operators. That’s the way the market works today.

 

Comment: Can I just add on that point that I am the author of a document released yesterday by a Government advisory group on carbon capture and storage. We identified four projects that can operate alongside green energy. This shows that there are alternatives and that energy generation doesn’t have to be £92.50/MWh, it doesn’t have to be 35 years, and it doesn’t have to be nuclear

 

Comment: Hinkley Point is well established technology (although we have to wonder why there have been so many problems with this technology). The contract would run until 2060. It feels like a ‘last century’ solution to a ‘this century’ problem. It is a relatively complicated reactor design by my understanding and it’s the sheer scale and longevity of this commitment in the context of a system that’s changed radically even in the last five years.

 

Question: You said that technology is mature and proven and yet it’s getting a ‘first of a kind’ contract, and yet you’ve also said that future power plants will be lower cost, but you’ve also got a contract at a lower price for the second power station ….

 

Answer: No, that’s a revision to the price for Hinkley if there is a second plant. Future plants would have a completely different CMD price negotiated and we are confident it will come down rapidly.

 

Question: If this is deemed to be too expensive and the Government walk away, what do you think the UK is, contractually, on the hook for?

 

Answer: You would need to talk to a contract lawyer about that. We’re writing a contract. There is always a contract, for example no wind farm is ever built without a contract. If you look at the wind farms that have been built to date, we’re paying £125 to £130 per MWh for the installed capacity of what’s been built. It’s an enormous amount of money that’s been invested in wind farms, but how do you compare these things? Another thing I would say is that in power we do half-hourly, or less than half-hourly, modelling because of demand fluctuations. We have to ensure that the lights stay on 24 hours a day as people demand it.

 

Comment: That’s all against a backdrop of a situation that has clearly changed. Electricity is simply getting cheaper and your contract is very expensive.

 

Answer: We have to see the evidence coming through, where the CMD reveals the full cost of the electricity being produced. Our analysis shows that the Dutch contract is not the same as a contract built in the UK.  Let’s wait until the next auction and see if you’re right. You need to be extremely confident about what you’re saying because in the meantime the country needs to make an investment to keep the lights on.

 

Comment:  The commenter listed a number of recent contract prices for large UK offshore projects, all of which were significantly higher than the contract price for Hinkley Point.

 

He made the point that if you are trying to build these kind of projects, they cost more money. If you look at even until the beginning of this year a contract was awarded at £180 per MWh and even before that, £400-500. The solar industry has only recently gone below the £100/MWh mark for 20 year contracts and they are much more intermittent. If renewable companies look at what they’ve had, they’ve had a very good time. CMDs are still £144-150/MWh, and not these £60 MWh figures.

 

Comment The evolution has gone through a series of phases. What you’re referring to is administrative prices negotiated with Government for offshore. At the most recent competitive auction, over a year ago, wind was £110/MWh for a 15 year contract. I agree that the Dutch and Danish evidence in the last year and a half says it’s got a lot cheaper. I agree that the Dutch conditions are not really translatable and we should do something to analyse that, but costs have been tumbling in these technologies, and that’s not the case with the project that we’re looking at here. What we need to understand is the system now is almost unrecognisable compared with the last century.

 

Comment: An industry that has only wind and solar doesn’t work, so when the coal goes what do you replace it with?

 

Question: Is it really all bad project management? We are told the design is ok and the technology is proven, but there are still changes in the design. If the target of 2025 is not reached, what would be the penalties?

 

Answer: The penalty is that there is no money until the plant is operational, so the reality is that if you have spent £18bn you have a massive incentive to get the plant operational.

 

Comment: If the operational date is delayed by 2 or 3 years, that would leave the UK without energy for that time. That should incur a massive financial penalty.

 

Comment: If you come in three years late you lose three years’ subsidy. That’s what should have been put in there.

 

Question: Should we wait until the next auction in six months before making a decision on cost?

 

Answer: Were you saying that when they were building wind farms? If you’d asked that question at the outset of renewables 10 years ago, nothing would have been built.

 

As a country we have to make decisions step by step. This particular decision is on Hinkley Point and only Hinkley Point. Other decisions on other things will come later, and future decisions about future nuclear plants will take into account information available at the time.

 

Question: There are a number of aspects to this apart from cost a lot has been said about the Chinese involvement in this and other projects and the security risk attached to that. Could the ONR please comment?

 

Answer: We would want to ensure that the licensee can demonstrate security. It is the same for nuclear safety. We need to be sure that the licensee can demonstrate that they have a secure operating platform with all the safeguards in place. There are issues around site security, and the last line of defence is that the mechanisms are hard-wired. There’s segregation and separation to protect the system.

 

Question: Do you review all the software?

 

Answer: In a similar way to safety, we have an inspection regime and we get assurances.

 

Question: On the subject of security of supply and the espionage issue, Australia refused the Chinese. What do they know that you don’t?

 

Answer: This is one of the aspects that the Government is looking at. I’m not party to these discussions.

 

Question: What would happen if the Chinese investment wasn’t forthcoming?

 

Answer: The approval is on the basis of the Chinese investment and I’m sure that will be the case. That’s the basis.

 

Question: Regarding reactor pressure, what are the issues around who can supply the steel? Given Chinese investment, they’ll be keen to prove themselves.. I would not use Chinese steel. What can the regulator do to make sure the problems experienced with the containment domes do not happen again?

 

Answer:  EDF is confident that the steel used will prove to be perfectly safe. There are two forgemasters (one in Japan and one in France) accredited with manufacturing the containment dome.

 

Comment: We share information with our French and Finnish colleagues. We can do targeted inspections. We wouldn’t sanction information sharing in the same way a state run Chinese company.

 

Question: What role is there for an independent regulator?

 

Answer: I was at a congress for nuclear new build where the UK process was widely praised because it does de-risk construction activities and enables regulatory involvement at an early stage.

 

 

The meeting closed at 1905.

 

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