On his visit to China this week, the chancellor of the exchequer, George Osborne, announced a £2 billion loan guarantee to Chinese companies to build a new nuclear power plant at Hinkley Point in Somerset. Since the plant will be built by private firms taking on eye-watering amounts of debt that will be paid off over decades, the loan guarantees are essential in order to keep the interest rates on that debt down to a minimum. Otherwise, lenders would have to build in a substantial risk premium in order to justify doling out the cash.
Hinkley Point C should be good news for a variety of reasons. Nuclear power stations, despite accidents at badly built or elderly plants at Chernobyl and Fukushima, have an excellent safety record compared with other sources of power. They are reliable, providing ‘base load’ power for roughly 90 per cent of the time (compare that with 25 per cent of the time for wind turbines) and have low running costs because they need comparatively little fuel once they are up and running.
Moreover, after decades of nuclear being out of fashion, getting one plant built would hopefully open the door to many more. Having built and fired up the first UK nuclear plant since Sizewell B in 1995, the experience gained would enable future plants to be built more cheaply. Generating power from a number of different sources – coal, gas, nuclear, renewables – would provide greater security of supply, too.
But the deal the UK government has struck for Hinkley Point C looks very expensive. The operator, EDF, has been promised a guaranteed price for its power of £92.50 per megawatt hour. (Another station in the pipeline, Sizewell C, has been offered a guaranteed £89.50 per megawatt hour.) That made some sense when it was thought that prices for fossil-fuel generation of electricity would shoot up over the next decade. But prices have recently fallen for coal and gas, bringing the wholesale price for electricity down to around £44 per megawatt hour. That’s one hell of a premium, one that will be index-linked to inflation and guaranteed for 35 years – time enough to pay off the plant. As commentators have pointed out, a nuclear plant should be able to operate for 60 years. EDF will be raking it in for decades after that. One consultancy described the Hinkley Point deal as ‘economically insane’.
Nuclear power should be much cheaper than that, and currently, it is. The electricity from Sizewell B now costs around £60 per megawatt hour. But the layering of regulation upon regulation to make nuclear very, very, very safe has resulted in ballooning costs. The government wouldn’t be touching this deal with the proverbial barge pole were it not for the overriding concern of climate change. Ministers know that a low-carbon economy is impossible without nuclear, especially if we replace all our current gas heating and petrol cars with electric versions.