Returns for French utility EDF and other investors in the UK’s first new nuclear plant in two decades, supported by the government, could be much higher than for other projects, according to a report published today by a think-tank.
Investors could earn returns of up to 21 percent over the lifetime of the project, Carbon Connect analysts say in a report, the preparation of which was overseen by a former energy minister Charles Hendry.
“Expected equity returns on Hinkley Point C are around 19 to 21 percent, substantially higher than expected equity returns on private finance initiative (PFI) projects and regulated electricity network assets,” the report says.
By comparison, returns are typically 12 to 15 percent for PFI projects and eight to 10 percent on regulated networks, the report says.
It is not yet possible to conclude on the value for money of the Hinkley Point C agreement, the report says. “Both the negotiation process and the resulting investment contract are important for determining value for money.
“It is difficult to judge the effectiveness of the negotiation process in driving value for money because it was neither competitive nor transparent.”
The report’s authors estimate that the 16 billion pounds (GBP) (26 billion US dollars, 19 billion euros) expected investment in Hinkley Point C includes GBP 10.2 billion of construction costs, GBP 2.2 billion of construction contingency, GBP 1.6 billion of interest during construction, GBP 2 billion of non-construction costs. It is not yet clear whether consumers would benefit from construction coming in under budget, the report says.
EDF plans to start operating the first new nuclear reactor at the Hinkley Point C site in southern England in 2023. The government will guarantee a loan to finance the project as well as a fixed minimum price for the electricity it generates for 35 years.
The report says one of the most immediate challenges facing the UK’s new build programme is obtaining approval from the European Commission on the package of support measures proposed by the government to support Hinkley Point C.
In December 2013, the EC launched an investigation to examine whether UK plans to subsidise the plant are in line with EU state aid rules.
The EC has said arguments used by the UK government in favour of state aid are “doubtful” or “not supported” by information.
The EC’s main concern is that EDF will receive a steady income for electricity produced by the station without taking into account the volatility of electricity prices. “We have reasonable doubts about the details of the deal,” said EU competition commissioner Joaquín Almunia.