"No one protected interests of consumers in Hinkley Point C deal" - says PAC report

REPORT SUMMARY

Hinkley Point C is the first nuclear power station to be built in the UK since 1995.

The Committee is concerned consumers are locked into an expensive deal lasting 35 years and that the Government did not revisit the terms between the original decision to go ahead and now, despite estimated costs to the consumer having risen five-fold during that time. 

Over the life of the contract, consumers are left footing the bill and the poorest consumers will be hit hardest. Yet in all the negotiations no part of Government was really championing the consumer interest.

As the financial case for Hinkley has weakened, the Government has talked up the boost to jobs and skills that Hinkley will generate. But the Government has no clear plan of how these so-called wider benefits will be achieved, or crucially how it will measure success.

We have seen other large infrastructure projects promise a lot of jobs and skills and not deliver. The Government must act now to firm up its vague promises of wider benefits so UK workers, supply chain businesses and apprentices can see tangible benefits.

With Brexit looming delivering a plan for the wider benefits has even more urgency as we cannot be sure that we will attract the necessary skills from overseas.

COMMENT FROM PAC CHAIR MEG HILLIER MP

“Bill-payers have been dealt a bad hand by the Government in its approach to this project.

“Its blinkered determination to agree the Hinkley deal, regardless of changing circumstances, means that for years to come energy consumers will face costs running to many times the original estimate.

“The Government made some grave strategic errors here and must now explain what it will do to ensure these are not repeated.

“But more than that, it must deliver the supposed wider benefits of this project – benefits Government has talked up progressively as the case for Hinkley Point C has weakened, but which it has no plan to secure.

“There is clearly scope to link the nuclear programme to the wider strategy of driving economic opportunities and growth.

“Government credibility in this area will inevitably be questioned when – by its own admission – it doesn’t know what UK workers and business will gain from this project, and appears to have no coherent idea of what to do about it.”

CONCLUSIONS AND RECOMMENDATIONS

The Department for Business, Energy & Industrial Strategy has no plan in place for securing the wider benefits of the project. With the case for Hinkley Point C weakening since the agreement of the strike price of £92.50/MWh in 2013, the government has increasingly emphasised the wider benefits of the deal, in particular, jobs and skills creation, and opportunities for businesses in the UK. The creation of the Department for Business, Energy and Industrial Strategy presents a clear opportunity to link the nuclear programme to the government’s industrial strategy to drive economic opportunities and growth. However, the Department does not know to what extent UK workers and companies will benefit from Hinkley Point C and the wider follow-on new nuclear programme, and has no plan in place to show how it will maximise the wider benefits of the project.

Recommendation: As part of its development of the industrial strategy, the Department needs to put a plan in place for realising the wider strategic and economic benefits of Hinkley Point C. The Department’s plan should explain how it will prove those benefits have been achieved.

No one was protecting the interests of energy consumers in doing the deal. The Department estimates that between £10 and £15 of the average annual household electricity bill (in 2012 prices) will go towards supporting Hinkley Point C up to 2030. Adding the costs of new energy infrastructure to bills could disproportionately impact on the poorest households who are less able to afford price increases. But the Department’s assessment did not sufficiently consider the costs and risks of the deal for consumers. Its assessment only went out to 2030, despite the long-term nature of the contract; and it did not consider whether consumer top-up payments would be affordable in the context of its support for other low-carbon technologies. HM Treasury did review the deal at various points but its emphasis was on the risk of the deal ending up on the government’s balance sheet and not on implications for consumers.

Recommendation: By March 2018, the Department should tell us how it will ensure there is an independent and transparent assessment of the impacts on consumers, including the impacts on the poorest households, when agreeing future energy infrastructure deals that are paid for through consumers’ bills.

The Department pressed on with locking consumers into an expensive deal, despite the case for Hinkley Point C and nuclear power weakening during its negotiations. The economics of nuclear power in the UK have deteriorated since the government last formally considered its strategic case for nuclear in 2008. Estimated construction costs have increased while alternative low-carbon technologies have become cheaper. At the same time, fossil-fuel price projections have fallen. The value-for-money case for supporting Hinkley Point C therefore weakened after the government agreed provisional terms for the new power station in 2013. In particular, the Department forecasts that consumers will now pay £30 billion in top-up payments over the contract’s 35 years, five-times more than the £6 billion it had expected in 2013. The Department did not attempt to renegotiate the deal in light of the weakening case because it assumed the project’s investors would not have accepted a lower return on the project and that the deal would have collapsed or been delayed. Given that both EDF and CGN are state-owned companies, that may well have accepted lower returns than the 9% built into the Hinkley Point C deal, the Department should have done more to explore whether this assumption was correct.   

Recommendation: The Department should re-evaluate and publish its strategic case for supporting nuclear power before agreeing any further deals for nuclear power stations.

The Department and HM Treasury did not sufficiently appraise alternative ways to finance the deal that might have offered better value for consumers. The deal for Hinkley Point C is expensive because the government wanted NNBG to bear all the construction risks. Alternative financing models, involving sharing the early project risks between the government and NNBG, could have significantly reduced total project costs. The Department and HM Treasury were adhering to a clear policy position at the time - that the private sector should finance the deal, keeping the project off the government’s balance sheet, and that there should be no public subsidy for new nuclear. The Department and HM Treasury also wanted to protect taxpayers and bill payers from cost overruns. But neither the Department nor HM Treasury demonstrated to decision makers the benefits and costs of alternative ways of financing the deal that might have resulted in better value for money.

Recommendation: The Department and HM Treasury should show decision makers the cost and risk implications of different possible financing structures when appraising large infrastructure projects, including its further nuclear deals, even if they are outside the prevailing policy. 

There is uncertainty over whether the project will be completed on time. If it is late, there would be a risk to energy security. The other projects using the same reactor technology as Hinkley Point C – in France, Finland and China –have seen significant cost and schedule overruns. Brexit could also have implications for the project due to withdrawal from Euratom, the pan-European atomic energy regulator, and the risk of people with nuclear engineering and science skills moving abroad. The terms of the Hinkley Point C deal mean that the developers will be liable for costs increasing and will not get paid until the project is complete. But there are examples of other big, complex UK infrastructure projects where the government has been required to take on more of the costs or risks when those projects ran into trouble. The government is less likely to have to pay more for Hinkley Point C if it maintains an alternative means of ensuring a sufficient supply of electricity. It is relying on its Capacity Market, a new mechanism designed to secure additional capacity to meet anticipated shortfalls in electricity supply, to mitigate known or likely slippages in delivering Hinkley Point C.

Recommendation: The Department should ensure it publishes its ‘Plan B’ for achieving energy security, while at the same time delivering on its decarbonisation and affordability ambitions, before the end of this year and should review and revise it every year in light of the latest progress at Hinkley Point C.

We are concerned about the Department’s ability to identify any possible delays as early as possible, given government’s poor track record on effective contract management. The government needs to know sufficiently in advance if the project is delayed so that it can commission alternative ways to match electricity demand and supply. For example, it expects it will need four-years’ warning to build a new gas-fired power station through the Capacity Market. The Department has set up a company, the Low Carbon Contracts Company (LCCC), to monitor Hinkley Point C’s progress and manage the contract. However, the Hinkley Point C contract is extremely complex, and LCCC will have to maintain capability many years into the future to monitor and manage it effectively. Government departments have a poor track record on contract management, as this Committee has reported previously, and we will be looking again at progress with Hinkley Point C and at how effectively the LCCC is performing its role.

Recommendation: The Department must ensure on an ongoing basis that the LCCC has the skills, capacity and access rights that enable it to monitor delivery on the Hinkley Point C project effectively.

The full text of the Committee’s Conclusions and Recommendations is included in the Report attached to this email.