NEWS FROM THE FRONT

Nine months ago the European Commission approved the Hinkley Point C State aid case and in my November 2014 Newsletter – my first – I welcomed the decision. I thought it was time to get behind the EDF proposal and put an end to arguments over how much EDF Energy and its partners should be allowed to earn through the guaranteed strike price mechanism.

I also felt that with the strike price saga out of the way Britain’s first new nuclear power station order for 25 years would go ahead. Now I’m far from certain that will be the case. If the Hinkley Point C power station, with its third generation EPR reactors, is built it may not be the first one either. NuGen’s Moorside new build project in West Cumbria seems to have a much more favourable wind behind it.

EDF’s Hinkley proposal has long been seen as the front runner in the race to get the UK’s anticipated nuclear energy renaissance under way – a race which needs to be won if the lights are not to go out in the not too distant future. An agreement with EDF’s potential Chinese investors seemed a formality last autumn when EDF was talking of a negotiation lasting three months. Now it expects a deal to be reached this autumn, getting on for 12 months – and even that looks optimistic.

As to the £24.5 billion cost of the project and the scale of the anticipated strike price revenues, I argued last year that businesses have always made profits which some might consider excessive. Caveat emptor is a sensible maxim. If the UK has been taken for a ride by EDF, I said, blame the politicians and civil servants who sidelined nuclear energy in the UK, with the support or acquiescence of the electricity utilities.

Between them they destroyed the country’s nuclear design, manufacturing and construction base. As a result the UK has been forced to go on the charge to find an overseas power station builder willing to fill the gap – any builder. The driving force has been concerns over the global warming effect of burning fossil fuels and a desire to meet international carbon reduction obligations which are simply not achievable.

TROUBLES COME IN BATTALIONS

The Claudius quote from Shakespeare’s Hamlet – “Sorrows come in battalions” – is often misquoted as “troubles come in battalions.” Either way – sorrows or troubles – EDF will be experiencing both emotions today. The company must be thoroughly depressed over what has happened since last November – financially and technically – and so must the French Government, which owns the company.

The UK Government, which finally came to the conclusion that the country had to have a major nuclear energy construction programme, not least because of the need to replace ageing nuclear stations as well as the coal-fired stations it wants to get rid of, can’t be too thrilled either.

Financially, there seems to be no end in sight to discussions involving the UK Government, EDF and EDF’s two anticipated Chinese partners over a financial package for Hinkley Point C. These were supposed to be completed four months ago, in March. A deadline of October, to coincide with a State visit to Britain by China’s President Xi Jinping, is now being talked about and while EDF is believed to still have the support of its Chinese partners they don’t seem in a hurry to sign off on the deal.

Until now I’ve felt that the Hinkley Point C project would go ahead, if only because so much money had been spent by EDF on preparatory ground work on the Somerset site. Now I’m not so sure. There are other voices, some among the SONE membership, which are getting more and more strident, suggesting that there comes a time when it is best to cut your losses.

The Treasury appears to be having serious misgivings about the project, too, according to influential papers such as the Financial Times, which I once worked for and whose views I still respect. According to the FT senior officials have been discussing the chances of obtaining more established reactor technology from elsewhere as a replacement for the Areva designed and built EPR reactors, which are getting a very bad Press in France, the UK and China.

The Treasury’s major projects authority has still to complete a review of the Hinkley Point financial information and while there is a reasonable expectation that it will be satisfied with what it finds this is by no means certain.

Chancellor George Osborne has warned EDF not to expect too much from the UK Government by way of further financial support. It has, of course, struck an agreement with the company promising to pay a guaranteed price for electricity generated by Hinkley C for 35 years and also promised to guarantee £16 billion of debt towards the project. At the same time it has insisted on conditions designed to ensure that the tax payers exposure will be minimal.

Instead the agreement stipulates that it will be the shareholders and not the Government who will retain the principal exposure if the EPR reactor technology turns out not to be viable. That is the very real concern which has led to the Chinese and the UK government getting the financial jitters.

The Conservatives underlined their commitment to Hinkley C as recently as their General Election manifesto and the Prime Minister reaffirmed his own personal commitment in April, saying he wanted EDF to start work “as soon as possible.”

But the Treasury’s hesitation over the project is an open secret and some officials would even like to revisit the strike price deal, which they regard as over-generous.

A further financial complication surrounds the plan for EDF to take a majority stake in the reactor business of Areva, the company behind the EPR reactor development at the centre of the technical concerns which are unnerving existing and potential customers and client nations. Both EDF and Areva are effectively owned by the French Government so some sort of merger agreement will no doubt be reached but the uncertainty over what it will turn out to be and how it will work in practice isn’t helping the situation.

There are serious doubts about the detailed financial terms. Areva to all intents and purposes is broke and any deal with EDF will have to include some prior write-off of debts and some acceptance by the French government of any continuing liabilities – not least in Finland. With the financial picture looking so bleak the French government (owner of EDF and Areva) must think that it’s a bit much for perfidious albion to keep harping on about the possibility of EDF making an exorbitant profit out of the Hinkley Point C project. Damage limitation is the name of the game.

FROM FINLAND TO FLAMANVILLE

Areva’s website is still describing the EPR reactor as “a cut above the rest.” I doubt if the Finns think so or, indeed, the French themselves. The Areva case is that thanks to the system’s optimised core design and high efficiency it improves upon other light water reactors, to the benefit of the environment. It is designed, it is said, to create less waste and allow for better waste management. Anyone coming fresh to the discussion might think that the new reactor was up and running, justifying Areva’s extraordinarily confident (and misleading) website description.

The fact is that 12 years after the first EPR (previously known as the European Pressurised Reactor and Evolutionary Power Reactor) was ordered by the Finnish TVO utility there is still not a single working example of the reactor. The earliest projected date for its completion of the first EPR is officially 2018, with cynics suggesting 2020 or later is a better bet. Delays have been ascribed to various problems with planning, supervision, quality control and workmanship.

The first problem that surfaced was something as simple, one would have thought, as irregularities in the foundation concrete at the Oikiluoto site in western Finland. This took months to sort out. Later it was found that sub- contractors had supplied heavy forgings that were not up to project standards and which had to be re-cast. An apparent problem constructing the reactor’s double containment structure also caused delays. And so it went on.

The most recent delays to the plant’s schedule have centred on the reactor instrumentation and control system, which gained approval from STUK, the Finnish regulator, in April, after four years of what Areva has described as “exchanges” (pretty heated exchanges one suspects) between the constructor and TVO.

In summary, the new EPR reactor being built at Oikiluoto is nine years behind schedule, its original budget has doubled and the reactor is the subject of a bitter legal conflict between Areva and TVO over who is to blame and who will have to be compensated. Areva’s most recent estimate of its losses at completion of the turnkey project stand at Euros 3.9 billion.

Small wonder, then, that earlier this year TVO abandoned its plans to order a second EPR at Oikiluoto and potential buyers in the United States, Canada, and China have followed suit, their hesitancy over the design compounded by problems in France itself at Flamanville, where the second EPR to be ordered is being built – or not being built for much of the time.

REACTOR VESSEL ANOMALIES

A couple of months ago Areva informed ASN, the French nuclear regulator, that “anomalies” had been identified in the composition of the steel in certain parts of the reactor vessel of the EPR under construction at the Flamanville site and that tests are to be carried out to identify the extent of the problem.

Earlier test results “revealed the presence of a zone in which there was a high carbon concentration, leading to lower than expected mechanical toughness values. Initial measurements confirmed the presence of the anomaly in the reactor vessel head and reactor vessel bottom of the Flamanville EPR.” Both forged steel components were manufactured at Areva’s Chalon/Saint-Marcel

plant, where it is intended to make the reactor vessel for Hinkley Point C. More recently there was further bad news for the Flamanville project when a leaked report from France’s nuclear safety watchdog highlighted faults in the reactor’s cooling system. The estimated cost of the Flamanville EPR had already increased from 3.3 billion Euros to at least 9 billion Euros while commercial operation of the reactor, expected in 2012, is now not expected until 2017.

The UK Government will be aware of all these developments at Flamanville and must be becoming increasingly unnerved by them. The need for a major nuclear power station programme to get under way is all too apparent and looking more and more pressing. To be fair to EDF the company is doing its best to help the situation by carrying out a major refurbishment at all eight of its nuclear stations, exending their lives, That programme is going very well but won’t be enough by itself.

WINTER DRAWS ON

The fact is that National Grid is going to have its work cut out to see the country through the coming winter. The UK’s hard-pressed electricity generating system – still waiting for the relief which nuclear energy may one day bring – is having to buy in emergency supplies to combat the risk of blackouts as early as this winter.

Even with these emergency supplies the margin of capacity over demand is expected to be 5.1 per cent this winter, the Grid has disclosed in a consultation document for power generators. This compares with last year’s 4 per cent, which was itself the lowest level for seven years. Without the emergency supplies the margin this winter would have been 1.2 per cent, the lowest in a decade.

The ever present risk of a plunge in temperatures has compelled the Grid to buy almost 2.6 gigowatts of capacity from four venerable power stations, which could be called on during any severe cold snaps this winter. The four power stations concerned are all fossil fuel burning – the 33 year old Peterhead plant in Scotland (gas), which is owned and operated by SSE, Centrica’s Killingholme station (gas) and GdF Suez;s Deeside (gas) and Uskmouth (coal) stations,.

The back-up power plant operators will be paid £37 million to guarantee they can fire up if needed in an emergency and they will be paid more if actually called upon. In addition to buying in emergency supplies the National Grid has also struck agreements with several major energy users who are willing to reduce their energy consumption at critical times and that also has a cost of course.

I began this Newslettter by reminding readers of my early support for EDF’s Hinkley Point C project, my sense that this is one of the more important projects we have so we’d better get on with it and sort out the problems. I am sure I will be criticised by some SONE members for allowing that support to waver. But not all, by any means.

One member, Mike Watson, felt strongly enough to contact me over the issue and as it happens his views are very similar to my own. Mike said that he gets very depressed with the negative reporting in the media about nuclear power and attributes this in part to the impression that EDF is in deep trouble with the EPR, with its rising costs and EDF’s attempt to work to a schedule which he regards as unobtainable.

But there are two other companies with new build plans in the UK which have more of a track record and which are never mentioned, Mike said.

One of the two projects he singled out is GE-Hitachi Nuclear Energy’s possible construction of up to five Advanced Boiling Water Reactor (ABWR) power stations at the two different nuclear sites which it owns in Britain, at Wylfa, Anglesey, and Oldbury in Gloucestershire. It is worth mentioning I think that four ABWRs are already in operation in Japan, with four more under construction in Japan and Taiwan.

MOORSIDE MOVES ON

The second project referred to by Mike is NuGen’s proposed £15 billion Moorside nuclear power plant at Sellafield in West Cumbria which could be generating electricity by the mid 1920s (at much the same time Hinkley Point C is expected to operate). A final decision on whether the joint venture between Toshiba and Engie (formerly GDF Suez) will go ahead is expected in 2018.

The AP1000 PWR is based on an established and well understood design, building and improving on the established technology of major components used in current Westinghouse-designed plants. Components such as steam generators, digital instrumentation and controls, fuel, pressurisers and reactor vessels are currently in use around the world and have years of proven, reliable operating experience according to Westinghouse.

Moorside would use three AP1000 pressurised water reactors built by Westinghouse, now a Toshiba subsidiary and once owned by British Nuclear Fuels, of happy memory for some of us. One of the AP1000’s attractions is that it comes with passive safety systems and a low-cost plant design which minimises the construction period.

Earlier this month NuGen and the UK’s Nuclear Decommissioning Authority (NDA) signed a contract to transfer land near the Sellafield site in Cumbria for NuGen;s Moorside power station. NuGen will now take responsibility for the land following payment of an undisclosed sum to the NDA.

Tom Samson, who recently took over as Chief Executive Officer of NuGen, has said that with the land agreements finalised the company was entering a three- year phase of site characterisation and preparation t decide on “tier one” engineering, procurement and construction (EPC) contracts.

Mr. Samson said NuGen will focus attention on designing these EPC contracts to build on delivery certainty, which involved supply chain choices as well as solutions that allowed the company not only to be competitive in terms of cost but to have certainty in bringing on the new generation of nuclear plants by the mid-2020s.

It all sounds very positive, as Mike Watson has suggested but Tom Samson has also struck a warning note. “There is a need for clarity and purpose in relation to the Government’s support for the programme, once the fog has lifted from Hinkley Point.” That is all too apparent.

Mr. Samson is obviously referring to reports that the Government is thinking of seeking a lower strike price for NuGen’s Moorside project than it agreed for Hinkley Point, which has been guaranteed a revenue of £92.50 per megawatt hour, linked to inflation, for 35 years. I am not sure that is a good idea for three fairly obvious reasons.

It doesn’t seem fair to NuGen. It will create further uncertainty about what the Government might do in the future, making it even more difficult to attract investors for other other new build projects. Finally, it will add weight to the Austrian Government’s complaint that the European Commission should not have approved the UK Government’s decision to grant State aid approval for the Hinkley Point C project, which it regards as a subsidy and which now seems to be a moveable feast.

Austria launched a challenge against the EC decision earlier this month when it lodged an appeal with the European Court of Justice. Its position is that “subsidies” are there to support modern technologies that are in the general interest of all European Union member states and that this is not the case with nuclear energy. It’s certainly true of Austria itself – it has no nuclear power stations and no plans to build them.

Both the UK Government and EDF have insisted that State aid approval for Hinkley Point C will withstand the long-awaited Austrian challenge. They are confident that the EC’s State aid decision is legally robust and say they have no reason to believe that Austria has submitted a challenge of any merit. Nevertheless, the two sides are understood to be discussing arrangements to cover the unlikely worst-case scenario – that Austria’s appeal, which could take years, actually succeeds.

They must also be keeping a wary eye on what comes of a possible legal challenge against EDF’s Hinkley Point C project by an alliance of German and Austrian energy companies. The last thing investors need is the prospect of long-running litigation, which may well lead to project sponsors and lenders taking great care to ensure that these risks are fully understood and dealt with satisfactorily before a final decision is taken.

It’s easy to see why Tom Samson is anxious for the fog surrounding the Hinkley project to lift as soon as possible. although I’m not sure it will. He has more than enough on his plate without having to keep an eye on somebody else’s troubled project. He recognises that NuGen must grow dramatically to be ready to hold site licensee status for Moorside, to manage the construction of a nuclear power plant and then to operate it successfully.

NuGen is currently carrying out an extensive consultation exercise among local people in West Cumbria, which it plans to complete by the end of July. This is a “strategic issues” consultation and is the first of two such exercises. The next will be held sometime next year, with detailed proposals, and the company will submit a Development Consent Order Application in 2017.

The Moorside project is anticipated to generate up to 21,000 jobs throughout its lifetime. During the construction phase, the peak years (expected to be between 2022 and 2024) will see up to 6,000 people employed in the Moorside Search Area, close to Sellafield, where NuGen expects to construct Moorside, and 1,000 or so wll be employed when the power station is up and running.

Employment potential is an important factor in maintaining support in West Cumbria, a hard-pressed area which has a long history of reliance on the jobs created by nuclear activity.