National Audit Office report on Hinkley Point C

Friday, 23 June 2017 00:01

The Department for Business, Energy and Industrial Strategy’s deal for Hinkley Point C has locked consumers into a risky and expensive project with uncertain strategic and economic benefits, according to today’s report from the National Audit Office. It is a widely shared view that the UK needs some new nuclear power to ensure the lowest-cost route to decarbonisation. But when the Department finalised the deal in 2016 its value-for- money tests showed the economic case for...Request free trial

It is a widely shared view that the UK needs some new nuclear power to ensure the lowest-cost route to decarbonisation. But when the Department finalised the deal in 2016 its value-for- money tests showed the economic case for Hinkley Point C was marginal and subject to significant uncertainty. Less favourable, but reasonable, assumptions about future fossil fuel prices, renewables costs and follow on nuclear projects would have meant the deal was not value for money according to the Department's tests.

Today’s report finds that the Department has not sufficiently considered the costs and risks of its deal for consumers. It only considered the impact on bills up to 2030, which does not take account of the fact that consumers are locked into paying for Hinkley Point C long afterwards. It also did not conclude whether the forecast top-up payments are affordable.

The government’s case for the project has weakened since it agreed key commercial terms on the deal in 2013. Delays have pushed back the nuclear power plant’s construction, and the expected cost of top-up payments under the Hinkley Point C’s contract for difference has increased from £6 billion to £30 billion. But the Department’s capacity to take alternative approaches to the deal were limited after it had agreed terms. The government has increasingly emphasised Hinkley Point C's unquantified strategic benefits, but it has little control over these and no plan yet in place to realise them.

Today’s NAO report finds that the Department aligned its approach to the Hinkley Point C deal with its support for other low-carbon technologies. This means the private sector bears the risk that construction costs overrun. The NAO’s analysis suggests alternative approaches could have reduced the total project cost. The Department did not assess whether this would have resulted in better value for money for electricity consumers.

There remains the risk that NNB Generation Company Limited (NNBG) will seek further financial support from the government, notwithstanding the contractual terms of the deal. The reactor design for HPC is unproven and other projects that incorporate it are experiencing difficulties. Furthermore, EDF's financial position has weakened since 2013. The Department plans to develop and maintain alternative ways of ensuring energy security to mitigate the risk of needing to provide additional support for Hinkley Point C.

It will not be known for decades whether Hinkley Point C will be value for money. This will depend on whether the current contractual arrangements endure, along with external factors – in particular, future fossil fuel prices, the costs of alternative low-carbon generation, and developments in energy technology and the wider electricity system.

The Department has, however, negotiated a deal that means some terms can be adjusted in consumers’ favour in future. It must now ensure it has the right oversight arrangements in place to manage the contract in a way that maximises Hinkley Point C’s value for consumers and taxpayers.

Amyas Morse, head of the National Audit Office, said today:

“The Department has committed electricity consumers and taxpayers to a high cost and risky deal in a changing energy marketplace. Time will tell whether the deal represents value for money, but we cannot say the Department has maximised the chances that it will be.”

Key facts

£18 billion

estimated cost to construct Hinkley Point C (in 2016 prices)

proportion of Great Britain’s estimated electricity requirement met by output from Hinkley Point C in the mid-2020s

£92.50

price (in 2012 prices) to be paid to NNB Generation Company (HPC) Limited (Hinkley Point C's operator) per megawatt hour of electricity generated for the first 35 years

£30 billion	estimated present value in March 2016 of future top-up payments under the Hinkley Point C contract for difference (2015-16 prices discounted to 2015)
9%	the expected return to Hinkley Point C’s investors net of the impact of taxation (norminal post-tax equity return on the project)
£10-15	Department for Business, Energy & Industrial Strategy’s estimate of the amount from the average annual household electricity bill that will go towards supporting Hinkley Point C up to 2030
£21-£24	the Department’s estimate of the average increase on annual electricity bills up to 2030 if Hinkley Point C is delayed by three years and replaced by low-carbon alternatives
£7.3 billion	NNB Generation Company (HPC) Limited’s (NNBG’s) estimate of the costs of decommissioning Hinkley Point C and managing its waste (in 2016 prices)
£79.7 billion	NNBG’s estimate of the net project cash flows by the end of Hinkley Point C’s operational life in 2085 (in 2016 prices)

Notes for Editors

1. The Department for Business, Energy & Industrial Strategy announced on 29 September 2016 that it reached a deal to support construction of the Hinkley Point C nuclear power station. It will be the first nuclear power station built in the UK since 1995 and the Department expects that it will generate around 7% of Great Britain’s expected electricity requirement from the mid 2020s.

2. Nuclear New Build Generation Company Limited (NNBG) will build and operate Hinkley Point C. NNBG is owned 66.5% by Electricite de France (EDF) and 33.5% by China General Nuclear Power Group (CGN).