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Confusion over taxpayers' liability for Hinkley C costs

Uncertainty surrounded taxpayer liability for construction of the £16bn Hinkley Point C nuclear plant this week after the government agreed an energy price guarantee deal with French energy giant EdF.

After months of deliberation, the Department of Energy and Climate Change (Decc) and EdF this week revealed they had agreed a price for the electricity generated at Hinkley C, when it begins operating in 2023.

EdF will receive £92.50/MWh for its energy. But this will drop to £89.50/MWh if EdF is able to share the upfront costs of the major investment with construction of its proposed Sizewell C project in Suffolk.

EdF said that Hinkley’s prequalification for the government’s UK Guarantees scheme had been crucial to ensuring investor confidence in the scheme.

EdF is the major equity partner in the scheme with a 45% to 50% share of the equity investment in the project, which will also be funded by bank finance.

Reactor designer Areva will take a 10% equity stake and China General Nuclear Corporation with China National Nuclear Corporation will together take a 30% to 40% share.

Early indications are that Treasury-guaranteed debt will finance 65% of the expected cost up until Hinkley C comes into operation. Construction of the two new nuclear power units to be built at Hinkley is expected to cost £14bn at 2012 prices plus a further £2bn to cover other expenditure including  land purchases.

EdF will have to pay a fee for the government guarantee.

Announcing the deal, energy secretary Ed Davey was at pains to emphasise that construction risk would lie with EdF and its shareholders.

“We have agreed that construction costs do not fall on the consumer but instead on EdF and its co-investors,” he said.

Davey was clear that no risk lay with consumers, but there was less clarity about what risk would lie with the taxpayer via the government debt guarantee.

Davey said that there were political risks to the scheme – such as a withdrawal of future support for a new nuclear policy – that could result in the operator being compensated.

Decc permanent secretary Stephen Lovegrove  refused to rule out the possibility that the taxpayer would be exposed to the risk of construction cost overruns. Lovegrove and Treasury commercial secretary Lord Deighton led negotiations on the Hinkley C deal with EdF.

“It’s very difficult to answer [what the guarantee] will not cover,” he told NCE. “You’re asking us to give the terms of an agreement of something that’s not yet signed.

“Also there are still financing deals that have to be struck [with Hinkley investors], including with the Chinese.”

Letters of intent have been signed by the equity partners but discussions with a shortlist of other potential investors who could take a 15% equity share are ongoing.

Construction of Hinkley C relies on the use of the controversial European Pressurised Reactor (EPR), the same design as that used at EdF’s Flamanville 3 plant in France.

That project hit delays of four years, pushing its planned commissioning out to 2016. Costs have escalated to a projected price of £6.76bn in December last year.

Cost hikes and delays at Flamanville raised concerns for Hinkley C.

But EdF has said that its experience on that project will prevent delays on future schemes and pointed to its construction of two EPRs at Taishan in China, which followed on from Flamanville and which has taken half the time of the Flamanville project.

EdF Energy chief executive Vincent de Rivaz said that the firm was “hugely incentivised to deliver the scheme on time”, and added that it had offered to share potential gains with consumers if construction savings could be made.

A Treasury spokesman said the government guarantees scheme was “all about getting great projects that are struggling to raise finance in the current climate across the line”.

“In most cases no money will be paid out – these are commercially viable projects,” the spokesman added.

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