Hinkley Point C in Somerset will cost £1.5bn more than planned, says developer EDF, and completion could be delayed by 15 months beyond the 2025 target date. In one sense, this news lacks any element of surprise. EDF only seems to build nuclear reactors that are late and over-budget, as witnessed in Finland and on its own patch at Flamanville in Normandy.
Yet the timing of EDF’s “clarifications” is a shock. It is very early in the life of this £18.1bn (now £19.6bn, possibly rising to £20.3bn) project to be recasting the numbers. The tricky stages of construction, like pouring the right mix of concrete, lie ahead. The additional costs relate to mundane matters, such as “a better understanding” of UK regulators’ requirements and “the volume and sequencing of work on site”.
These are planning areas in which EDF would surely have made allowances for uncertainties. That all that slack, and more, has been used up is puzzling. Sceptics within EDF who argued that Hinkley is too big and too financially risky will feel vindicated already. EDF’s projected rate of return on the project was never high at 9%; now it is down to 8.5% and will fall to 8.2% if the delays materialise.
Still, it’s a French problem, right? Didn’t the UK government insulate us by making EDF and its Chinese co-financier shoulder the construction risks? Wasn’t that the trade-off for the UK guaranteeing to buy all Hinkley’s electricity for 35 years at twice the current wholesale price?
Well, yes, that’s how the contract is structured, and EDF’s UK boss was full of reassurance on Monday that UK taxpayers remain protected. But no contract of this size is ever so straightforward, as the National Audit Office pointed out in its blistering report last week.
“If the HPC [Hinkley Point C] project or developer runs into difficulties, the UK government could come under pressure to provide more support or take on additional risk, particularly given HPC’s potential importance to ensuring energy security,” said the NAO.
That dire circumstance remains some way off, but it can’t be ignored. What if real engineering problems follow? What if EDF’s projected returns fall to 7%, which would be closer to the company’s cost of capital? Would EDF seek better terms knowing that Hinkley is scheduled to provide 7% of our electricity?
“The [UK] government will hold a stronger negotiating position if it maintains alternative ways of ensuring energy security if HPC runs late or is not completed,” said the NAO. That advice was sound last week, now it looks prescient.
It is bad enough that UK consumers are locked into this “expensive and risky” project, as the NAO called Hinkley. It would be calamitous if we end up being bullied into paying more. Ministers need to draw up a proper contingency plan – starting now.
This is how political U-turns are performed in the energy sector – not with a visible yank on the steering wheel but with some vague words from the secretary of state designed to disguise the manoeuvre in hand.
As Ofgem announced a limited price cap that will apply only to yet-to-be-defined “vulnerable” customers, the business and energy secretary, Greg Clark, attempted to suggest the government could yet go further. “I will consider next steps when I have received Ofgem’s proposed actions,” he declared.
Next steps? Clark, like everyone else, can see that the gap between Ofgem’s proposal and Theresa May’s promise of a universal price cap is huge. It won’t be closed by a few steps. Ofgem’s proposed “safeguard tariff” is modest and targeted, probably at households that qualify for warm home discounts. May’s idea would have overthrown the entire regulatory philosophy of the past 20 years.
What Clark is really looking forward to seeing, one suspects, is everybody forgetting that the prime minister once promised to “protect around 17 million families on standard variable tariffs” by knocking £100 off their energy bills every year.
Don’t blame Ofgem, incidentally, for declining to live up to the Conservative party’s election hype. The regulator has technical powers to propose a universal price cap, but it also knows that such a muscular approach would invite an appeal by the energy suppliers to the Competition and Markets Authority. Since the CMA last year rejected a full price cap, the appeal would probably succeed.
Parliament, in other words, is the only body that can make a universal cap stick. Clark’s wishy-washy response suggests the idea is virtually dead for now, killed by resistance from those Tory MPs who viewed the proposal as anti-market. Shares in Centrica, owner of British Gas, rose nearly 2%. Investors can see the political U-turn happening.