Strike price for nuclear still in negotiation - Energy and Climate Change Committee evidence session

The UK parliament’s Energy and Climate Change Committee heard evidence yesterday from representatives of the nuclear industry on the challenges of building new nuclear capacity in the UK.

A twitter message following the session was a pithy yet fairly accurate description of the bargaining relationship between EDF and the government: “How much is it?” EDF: “How much have you got?”

Indeed, EDF is currently negotiating with the government over the long term return on investment it will receive for the electricity generated from its planned new nuclear reactors at Hinkley Point (Somerset) and at Sizewell (East Anglia).

At the heart of the negotiations is the strike price, a guaranteed price per MWh of electricity generated that would be received by EDF. In the contracts for differences (CfDs) context, this means that if the price in the market falls below the strike price, then EDF would be paid the difference. 

The government is in a delicate position in its negotiations with EDF - it intends to have 16GW of new nuclear power in the UK by 2025. Without this there is a grave danger of failing to meet its EU agreed carbon reduction goals. However, the French utility is the sole company – under the name of its jointly owned subsidiary with Centrica, Lake Acquisitions – that intends to invest in the two sites, each with a capacity of 1.6GW. 

EDF’s CEO Vincent de Rivaz firmly refuted the Committee’s insinuation that EDF had inflated its expected costs to build the plants. Instead, he insisted that the ‘perverse incentive’ was not to inflate costs, but rather to have a transparent cost discovery process to show that nuclear energy is a competitive form of generation.

But over and above the price put on the table, Monsieur de Rivaz put it quite simply: EDF’s investment decision depends on the CfD price. Without this, there is no clarity, and EDF is relying on the government to be serious and provide such clarity. This is an issue of primary importance, as the ultimate cost to UK consumers will depend on the strike price for different types of low carbon technology agreed on in the forthcoming electricity market reform bill.  

At the evidence session the strike price for nuclear was repeatedly compared with the expected and desired long term cost for off shore wind at £100/MWh – as offshore wind would be the main renewable alternative in the absence of nuclear. Despite uncertainties as to what offshore wind will cost in the vicinity of 2020-2025, it was clear that nuclear is, and will be expected to be, competitive with respects to offshore wind, and its strike price may be capped at £100/MWh. 

Written by Yasmin Valji

Analyst, Datamonitor Energy & Utilities

Follow Yasmin on twitter: @YasminV_DMEN

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