Contracts for UK Hinkley plant despite uncertainty

13 September 2016

Rolls-Royce announced on 9 May that it has been awarded ‘preferred bidder’ status for a contract to supply an integrated nuclear emergency diesel system for the UK’s Hinkley Point C nuclear NPP. The contract comprises an MTU diesel generator made by Rolls-Royce Power Systems and Rolls-Royce patented instrumentation and control technology (I&C). The previous day, Wales-based Express Reinforcements said it is to supply 200,000t of reinforcing steel to Hinkley. The company has been given preferred bidder status via the Tier 1 contractor BYLOR as part of the continuing preparatory work for the project.

However, Hinkley was unexpectedly put on hold for review in July by Prime Minister Theresa May just after the project was approved by EDF and a final decision is expected later in September. Harry Holt, Rolls-Royce, President – Nuclear, said: “We continue to work very closely with EDF Energy, a highly-valued customer of ours. We hope very much to be able to finalise these important contracts as soon as we are able to do so, and play our part in the delivery of the UK’s first nuclear reactors in more than 20 years, which will provide reliable, low carbon electricity for future generations.”

May postponed plans to construct the GBP18bn ($24bn) nuclear plant, which EDF plans to build at Hinkley with funds from Chinese investors, citing concerns about cost and security. Both China and France have been pressing for a positive decision.

The UK's finance minister, Philip Hammond, told the House of Lords Economic Affairs Committee on 8 September that he believes the project “does meet the criteria for a well-designed transfer of risk in an area where risk has never been effectively transferred from the buyer to the seller before”. He was responding to committee chairman Clive Hollick, who said: "There seem to be many questions hanging over whether in fact Hinkley can ever be delivered, so surely it would fail the test of being a well-designed off-balance sheet transaction."

Hammond said the assumed return in the EDF model is 9%, “but what one has to remember is that this project as proposed delivers something that has never been delivered by a civil nuclear project anywhere in the world. It transfers the design, construction and operation risk entirely to the operator.”

He added that the rate of return appears high because it includes “a very hefty insurance premium”. However, he added that, if the project fails to generate electricity, “it will never generate a penny of return”. There will also be penalties if he project is delayed. Hammond was referring to the contract for difference (CfD), which is a private law contract between a low-carbon electricity generator and the government-owned Low Carbon Contracts Company. The generator is paid the difference between the 'strike price' - a price for electricity reflecting the cost of investing in a particular low-carbon technology - and the 'reference price' - a measure of the average UK market price for electricity. The CfD for Hinkley Point C includes a strike price of GBP92.50/MWh with a payment duration of 35 years from the point at which each reactor at Hinkley becomes commercially operational or the last day of the target commissioning window for that reactor, whichever is earlier.

In a letter to the Financial Times published on 9 September, members of EDF Energy's stakeholder advisory panel set out "the five main reasons" why they believe May should approve the Hinkley project. First, the UK "needs new nuclear generating capacity to replace its ageing fleet, to provide stable supplies of low-carbon electricity for decades and to reduce the country's reliance on imported energy”; second, EDF Energy has an "outstanding record" as a NPP operator  and has increased the productivity of the UK’s NPPs since it took then over; third, “we do believe today's depressed wholesale prices are not a basis for comparison”, and that the Hinkley deal is “competitive with other future generation options when the price of carbon is properly costed”; fourth, EDF has been working closely with its Chinese partners in the Hinkley project "for many years" and they are "close to the successful completion" of two reactors at Taishan, China; and finally, the project will provide a "vital part" of the UK's industrial strategy.

The letter was signed by: Richard Lambert, former director general of the Confederation of British Industry; Diane Coyle, professor of economics at the University of Manchester; Chris Patten, chancellor of Oxford University, former governor of Hong Kong and former European commissioner; Simon Robertson, former chairman of Rolls-Royce and former deputy chairman of HSBC; and Helen Alexander, chair of British events group UBM.



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