The Most Expensive Object in the World. Or not.

Hinkley Point C is a proposed new nuclear power station in Somerset. Since the Government first announced the terms of a putative deal with developer EDF, the plan has been criticised for being unnecessary, the wrong technology, employing too many foreign workers, doomed to delay, too nuclear waste-y and too illegal. If you are a young graduate trying to break into the energy industry and are looking for a fashionable opinion, I would encourage you to be anti-Hinkley. Unless you want to work at EDF.

Recently there has been a flurry of articles on another controversial aspect of the project, the cost. At this stage, anyone writing about Hinkley is obliged to mention the claim by city analyst Peter Atherton that Hinkley Point C will be the most expensive object in the world, largely because the International Space Station fails the “in the world” test.

If you pay energy bills in the UK, this matters to you because you’re going to pay for it. So how expensive is it going to be? The strangest thing about Hinkley is that no one has had to produce that estimate. My ball-park figure for how much Hinkey is going to cost bill payers is £21–47bn. That is a ball-park £26bn wide. That is not so much a margin as a territory of error.

This is because the amount that we will pay to EDF to build Hinkley is dependent on the wholesale price of electricity between 2023–57. And no one knows what that price is going to be.

Contracts for Difference

Before we can estimate the cost of Hinkley, we need to understand the curious subsidy mechanism being employed here. You (the consumer) will pay for Hinkley Point C twice on your energy bill. The first time will be in the normal “wholesale costs” part of the bill: Hinkley produces electricity. This gets sold on the market at whatever the going price of electricity happens to be. Eventually it makes its way to your telly, light-bulbs, electric car. So far, so run of the mill.

But then the subsidy kicks in. This is because the Government have promised EDF that they will get a certain amount (“the strike price”) for every unit of electricity that Hinkley produces, no matter what the market price happens to be. The guaranteed price is £92.50 per MWh. If EDF sell the Hinkley electricity onto the market and find that the market price is less than £92.50/MWh, then the Government steps in, charges consumers a second time to make up whatever the difference is and hands it over to EDF. If EDF was able to sell the electricity for £50/MWh, the extra consumer top-up will be £42.50/MWh. So you’ll get charged twice: once in the wholesale cost, where Hinkley is indistinguishable from any other source of electricity, and once on this special top up levy.

That levy is the subsidy — it’s the bit that we pay Hinkley over and above market prices. The whole arrangement is known as a Contract for Difference (“CFD”) and similar agreements are now being used to subsidise most low-carbon electricity. The Hinkley CFD will run from the moment the power station switches on (currently slated for 2023) for the next 35 years.

One outcome of this arrangement is that if wholesale prices fall (i.e. energy becomes cheaper), then there will be more topping up for the consumer to do to reach that £92.50/MWh. The cheaper electricity becomes in the market place, the more subsidy we will have to pay to support Hinkley.

When Peter Atherton describes Hinkley as almost extra-terrestrially expensive, he doesn't mean that the cost to EDF of actually building the thing is going to record breaking. He means that this subsidy is going to be excessive. That’s what I'm estimating below.

In this illustration, you have the fixed price in black (lingo: “strike price”), a fluctuating market price in red (lingo: “reference price”) and the changing size of the consumer “top-up” in blue stripes.

Note that higher prices in the market mean that there is less topping up for the consumer to do.

Forecasting the cost of Hinkley

So if we want to find out how much the consumer will pay in this “top-up”, we need some forecasts of the wholesale price. The problem is that no one is foolish enough to take a punt on wholesale prices 2023–57. Consider the reverse position: would you pay any heed to an analyst in 1972 telling you that they knew the price of oil 1980–2015?

So, in my opinion, none of the numbers that come out of the next graph are correct. Worse, they are all hopelessly wrong. But the fact that you have to be pretty foolish even to throw up an estimate of how much the consumer will pay for Hinkley proves a point about the level of uncertainty here, and how the consumer is on the hook. (And the fact that Government doesn't have to offer such a figure is a separate point about transparency and scrutiny).

First of all, I've moved the strike price of £92.50/MWh into 2014 prices, because £92.50 is in 2012 prices and the whole thing is index-linked. That’s the solid black bar running along the top. Then I've taken four different guesses about what will happen to the wholesale price. The Government produce a forecast of energy prices up to 2035: in one series I've included this forecast and then extended based on the trend 2023–35, in the other I've extended based on the trend 2001–2035. Chris Hope, in the twitter exchange that sparked this blog, thinks that you may as well assume flat prices, so that’s in there. Aurora Energy caused a few stirs by forecasting decreasing wholesale prices to 2030, so I've extended those on a linear trajectory. The result is the graph below: one strike price, four guesses at the wholesale price.

Worth stressing that Aurora Energy do not give any figures beyond 2030. This is my extrapolation, not their forecast.

Now we need to know how much the consumer will pay. I've put the working for this section at the end, but in short the distance from the four wholesale price guesses to the strike price in the above graph tells us how much the consumer will subsidise (“top-up”) per MWh produced. We can then make a reasonable guess as to how many of these MWh Hinkley will pump out per year.

That gets us to this: a graph showing the annual payments to Hinkley in each of these scenarios.

First thing to notice: big numbers. The flat prices scenario involves paying EDF just shy of £1bn a year (again, this is just the subsidy bit). Second thing to notice is that the scenarios forecasting lower wholesale prices involve much bigger payouts, with this graph roughly an inversion of the previous one. In total, the cumulative payments 2023–57 range from £21.5bn in the “DECC 2001–35” trend scenario to £46.8bn in the “Aurora Energy extrapolated” scenario. Chris Hope (“flat prices”) says £33bn.

I’d hesitate to say which scenario is most likely. Extrapolating the Aurora figures probably takes you into unreasonably low territory by 2057, so I’d discount that. But there are a number of indicators suggesting long term declines in wholesale prices, such as the merit order effect derived from increasing the amount of renewables on the system. So I think the 2023–35 scenario (light blue) and the flat prices scenario (red) are probably closest: £30bn and £33bn respectively. But no one can forecast these trends out to 2057.

Is Hinkley going to be the most expensive object in the world? Yes, maybe. But the fact that it is impossible to answer that question should be a bigger source for concern.


Post-script:

Converting the difference between wholesale price and strike price into a figure for annual expenditure:

Capacity of Hinkley: 3.2GW

Which means that it produces 3.2GWh per hour, or 28032GWh per year.

But it won’t run all the time. Let’s assume it runs 80% of the time, which is what new American nukes are getting (H/T Chris Hope). That means 22425.6 GWh per year. Convert to MWh and times by the £/MWh difference between wholesale price and strike price for each scenario and you’re there.

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