A long and winding road?17 November 2016
Following the recent decision by the UK government to approve Hinkley Point C Rumyana Vakarelska lifts the lid on the challenges the project still faces.
Hinkley Point C, the 3200MW planned nuclear plant in Somerset in western England, will become the first third generation nuclear plant in the UK after receiving final approval from the UK government on 15th September.
Planning for Hinkley Point C started with a White Paper in 2006. The plant will be the largest capacity nuclear project in the EU, and will cost £18 billion to build, on current estimates. The deal is the result of a complex transaction between EDF, China General Nuclear (CGN) and the UK government, backed by state-guaranteed loans.
A so-called ‘Contract for Difference’, guaranteeing that power produced by Hinkley Point C would receive a fixed (and index-linked) price for electricity produced, was signed on 29th September by Secretary of State for Business, Energy and Industrial Strategy Greg Clark, EDF Group Chairman and CEO Jean Bernard-Levy, and CGN Chairman He Yu. The project will now move from the development and local civil construction stage to the main nuclear construction stage, although no timetable for that step has been published.
The contract signing had been delayed for several weeks by new Prime Minister Theresa May, who said entering office that she wanted to review it. Stephen Thomas, professor of Energy Policy at the University of Greenwich, commented: “During the review of the Hinkley Point C project by Theresa May’s government between 29th July 2016 and the government’s approval on 16th September, no explanation of the grounds [for the review] or who carried out the review was provided.
“There was no report of the review either other than press reports on the presence of CGN, where the issue was the future of ownership in relation to sensitive issues such as access to military technologies and reliance on China for key infrastructure.”
Engineering reports on Hinkley Point C
As the contract was under assessment, engineering and nuclear industry consultant Large Associates published a series of reviews of steel manufacturing failures that have hit Areva, the Hinkley Point reactor supplier. In the most recent review, published alongside the contract signing on 29th September. Large Associates noted that the reactor pressure vessel at Flamanville 3 – France’s first EPR and the model for Hinkley Point C – which is already installed, does not have a Certificate of Conformity issued by French regulator ASN. That means it does not comply with the European Directive on Pressure Equipment and does not meet ASN’s requirements. Since 2008, the directive has stipulated that any new nuclear reactor coolant circuit component has to have a Certificate of Conformity before production of that component commences, according to Large Associates.
The Large Associates Review also noted that Areva’s component manufacturing problems may directly affect EDF Energy’s currently operating Sizewell B plant in Suffolk, which includes components forged at Le Cruesot, the forge that is at the centre of ASN’s investigation and is now owned by Areva.
Large Associates believes the urgency of evaluating the risk situation for the operating nuclear plants in France means that ASN has "deprioritised" work Flamanville 3. That has implications for Hinkley Point C because there is a greater likelihood that Flamanville 3 will not reach the deadline for operation and validation of its technology by the UK Credit Guarantee cut-off date of December 2020.
If this happens and delays cause financial problems it will affect UK Tier 1 and Tier 2 sub-contracting companies. In addition, the contractors’ agreements with EDF may be affected by ongoing negotiations over the UK’s exit from the European Union. That has already caused the value of the UK pound to fall against the euro.
Meanwhile, fear of further delays and a further price increase for the EPR at Olkiluoto 3 in Finland are behind Finnish utility Teollisuuden Voima (TVO)’s decision in September to start fresh legal action against Areva. The action aims to avoid further delays, according to a TVO spokesperson.
Olkiluoto 3 is almost a decade behind schedule and close to completion, but TVO wants assurances that a restructuring of plant supplier Areva, following well-recorded financial difficulties, will not cause further delays and that the reactor will be able to start operations in 2018. In addition, TVO has also approached the European Commission, which has opened an investigation to determine whether the French financing for the restructuring complied with European Union state aid rules.
The original cost of Olkiluoto 3 was €3.2 billion, but in 2012 Areva estimated the overall cost would end up closer to €8.5 billion due to the delays. Olkiluoto 3 will be Finland's fifth and largest reactor, producing about ten percent of the country's power.
The UK government’s final approval for the plant’s construction in September came after Theresa May’s review. EDF will hold a 66.5% stake in Hinkley Point C and CGN will own the remaining 35.5%.
The government will provide loan guarantees for the project. The CfD, signed on 29th September will guarantee EDF Energy a price of £92.50/MWh (in 2012 pounds, index-linked) for 35 years for the power from the plant.
May approved the project with conditions that give the UK government a veto on EDF selling a majority stake in the project. That veto came in the form of an ‘exchange of letters’ between EDF and its board and the UK government. In the letters, EDF agreed that it would not sell a majority stake without UK government approval during the construction phase of the plant.
That agreement signalled a change in approach to infrastructure ownership by the UK government, which has previously had an open door policy on overseas ownership of infrastructure. The government signalled a more restrictive approach in future, but George Freeman, chair of the Prime Minister’s Policy Board, suggested that might not take the form of share ownership. Freeman said the government was still “reasonably relaxed” about foreign ownership of UK business and infrastructure. The question was “not who owns it but what is their commitment to the UK?”
Hinkley Point C has received consistent support from the Chinese government since it decided to invest in the project. One of the reasons is that China believes that its investment in Hinkley Point C will ensure that China’s Hualong-One (also known as the HPR-1000) reactor design will undergo the UK’s ‘Generic Design Approval’ new reactor design regulatory assessment.
The new procedure and process for complying with GDA was of particular interest to CGN, which is building an EPR in China and is likely to be the first country to complete this type of reactor given the delays at Flamanville and Olikluoto.
With the final signatures for Hinkley Point C, CGN has also committed to a suite of agreements relating to Sizewell C and Bradwell B with the EDF Group and the UK government. They will enable preparatory work to begin on Bradwell B, allowing CGN to put the Hualong-One technology through the UK’s Generic Design Assessment (GDA) process. The proposed Bradwell B project will be located in Essex, subject to the HPR1000 design receiving GDA approval, and will consist of two HPR1000 reactors each with an output of 1.15GW. CGN will file the GDA application to the UK’s independent, Office for Nuclear Regulation imminently, and aims to complete the approval process within five years.
The HPR1000 is China’s nuclear technology of choice for export. CGN’s Fangchenggang 3, currently under construction in Southern China, will be the reference plant for Bradwell B.
Hinkley Point C as a low carbon energy source
In September 2016, the UK’s PM Theresa May also signed the UK’s commitments to COP21 from the Paris Climate Change Summit in 2015, including delivering 25% of all UK energy from low carbon resources.
UK-based businesses will benefit from more than 60% of the £18 billion value of the project and 26,000 jobs and apprenticeships will be created. According to Vincent de Rivaz, the CEO of EDF Energy, EDF’s subsidiary in the UK, who spoke at a nuclear industry conference in September after the UK government approved the project.
“Hinkley Point C has all the attributes to play a decisive role now and in 60 years of operation as UK’s reliable secure energy source,” said De Rivaz.
“Projects like Hinkley Point C are complex, including design, approval and finance,” he said, addressing some of the concerns regarding delays and technical problems with other EPR power plants. “Hinkley’s ten year journey taught us the importance of leadership, which proved more difficult than I thought”.
De Rivaz noted that the “Hinkley Point C project is strong because it is strategic and is in line with the UK’s COP21 commitment to climate change together with all who ratified it, including also France, China and the US.” De Rivaz said that EDF has increased the safety at its plants by 51% and their performance by 50%, while extending the life of their AGRs in the UK by eight years on average. The AGRs will be still operational in 2025, when Hinkley Point C comes online.
De Rivaz committed to Hinkley Point C’s timely completion and said that the “golden share” framework suggested at the last moment by the UK government will strengthen the project, which will also become the most advanced nuclear project that EDF will deliver. “EDF will be learning from six other ongoing EPR projects”, including Flamanville 3, he said.
According to De Rivaz: “The Taishan EPR in China is a success, as it is running smoothly as the preparations for hot testing are on the way, while the UK will benefit as well from CGN [CGN’s investment in UK nuclear], which will contribute more than £1 billion in direct investment, as well as its own experience of EPR construction.
“Hinkley Point C will lead to the creation of 25,000 job opportunities on the site during construction, and will offer numerous opportunities for local and national businesses,” said De Rivaz. “Areva, GE-Alstom, as well as hundreds of French medium size businesses and SMEs will be committed to the success of the project”, he added.
EPR projects require caution
However, experts fear that the current examples of EPR projects require caution. “The Base Case Condition is that satisfactory evidence has been provided that Flamanville 3 has completed the trial operation period and that the requirements in respect of performance during such a period have been met”, said Stephen Thomas. “The Base Case Condition date cannot fall later than 31st December 2020. During the period up to the Base Case Condition being met, there is a cap on the amount of debt drawn,” Thomas continued.
During a state visit by the Chinese President to the UK in late 2015, the UK Treasury announced £2 billion in loan guarantees which would “pave the way for a final investment decision by energy company EDF, later this year, and with further amounts potentially available in the longer-term”.
The Treasury stated that further amounts would be available should EDF meet certain conditions and subject to fuller government approvals, according to Thomas. In addition, there are several major hurdles to be overcome before the construction of Hinkley Point C can begin.
The recent ASN publication on 24th September 2016 of a list of the nuclear power plants affected by the Areva reactor pressure vessel anomalies and irregularities demonstrates that the phenomenon not only has reached alarming proportions, but is continuing to grow under scrutiny, according to Large.
Ratings downgrades and other uncertainties
“Standard & Poor’s reduced EDF’s credit rating after the Hinkley decision, Moody’s did the same... for the third time this year”, said John Sauven, Greenpeace UK executive director on 29th September. Further on, “the economics of Hinkley don’t add up, as in recent years the price of renewables and storage has fallen and the technologies have developed, while EDF’s financial position is dire,” according to Sauven.
A ‘value for money’ statement released by the UK government in October concluded that the project was “within the range of the costs of alternative large-scale low- carbon generation technologies in the 2020s.”
It said the strike price was:
- towards the bottom of the comparable cost range of first-of-a-kind commercial carbon capture and storage (£77-249/ MWh) for delivery in 2025;
- towards the bottom of the comparable cost range of offshore wind (£81- 132/ MWh);
- towards the top of the comparable cost range of gas Combined Cycle Gas Turbines (CCGT) (£47-96/MWh); and,
- above the comparable cost range of large- scale solar Photovoltaics (PV) (£65-92/MWh) and onshore wind (£49-90/MWh).
A legal challenge raised by Austria, which argues that the UK breached EU State Aid regulations, will not be resolved until 2018. But that case could fall away as the UK exits the EU. On the other hand the exit raises other legal uncertainties and economic ones.