15 September 2016

Hinkley Point is a symptom of Britain’s broken energy market


Theresa May appears to have given the green light to a new nuclear power station at Hinkley Point. The problem is that all the evidence suggests that this project will be terrible value for money for consumers.

First, there is the cost of constructing Hinkley – which is, in a word, enormous. The power station is due to cost some £18 billion, according to EDF, the energy giant owned by the French state which is running the project. That is far higher than initial estimates in 2008, making Hinkley not just the world’s most expensive power station but possibly, as Simon Evans of Climate Brief points out, the world’s most expensive object full stop. That’s without considering the likelihood of significant delays and further cost overruns, as has happened with Hinkley’s sister plant in Normandy.

But it’s when the plant begins operation in the mid (or more probably late) 2020s that the bills really start to rack up. Peter Atherton – a well-respected energy analyst – has highlighted the enormous prospective costs over the coming decades.

EDF are being offered a guaranteed “strike price” for Hinkley’s energy of £92.50 per Megawatt-hour (MWh). That is around double the wholesale power price. This extraordinarily generous deal will run for 35 years – and is indexed-linked to the CPI measure of inflation. If wholesale prices remain as they are, the gap between Hinkley’s price and the rest of the market’s would amount to £50 billion over that time – roughly £18 per household per year. Almost any other form of power would be far cheaper: for example, Atherton argues that equivalent capacity could be created using gas for just 14% of the cost.

The Government argues that it has no choice but to build Hinkley (and other giant nuclear stations after that) if it wants to keep the lights on. But Britain’s failure to achieve value for money in this deal is just the latest in a string of blunders on energy policy.

As Tony Lodge pointed out in his CPS report on The Great Green Hangover, a combination of EU and domestic legislation, and misguided government interventions in the energy market, is leading to a capacity crisis. In particular, the imposition of a unilateral carbon floor price and the closure of old power stations to comply with EU emissions legislation is leading to a large-scale decline in our baseload generating capacity. This is leaving the UK’s energy system dangerously vulnerable.

Since 2010, it is estimated that over 15 GW of power has been lost from the system. National Grid’s latest report suggests that the gap between supply and demand is now just 0.1 per cent, increasing to 5.5 per cent with the use of emergency measures. These emergency measures, which include paying large businesses to stop using electricity, had to be used in November last year, and National Grid admits that such emergency measures may be needed again this winter. This is a real failure in government policy.

Of course, the Conservatives have made some progress in energy policy. In particular, the government has removed many roadblocks to the development of shale gas development (highlighted in a recent CPS economic bulletin). But this won’t solve the immediate crisis of energy security. Nor, incidentally, will Hinkley Point, which is only due to come on stream in the 2020s.

The overriding problem here is that the state is attempting to centrally plan Britain’s energy market. Market mechanisms have been squeezed out of energy policy to the detriment of consumers. If we don’t rethink our approach to energy policy – and take advantage of Brexit to liberate ourselves from the EU legislation that helped get us into this mess – Hinkley Point will be followed by many more rotten deals for the taxpayer.

Daniel Mahoney is the Head of Economic Research at the Centre for Policy Studies. This is an updated version of an article that previously appeared on the CPS website.