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History redux?

Hinkley Point C and its critics.

Recently, Chancellor of the Exchequer George Osborne gave the green light to the initial government guarantee for what might be the first new nuclear power station in Britain for 20 years – Hinkley Point C in Somerset. Miguel Coelho discusses some of the implications for the project, as well for the Government’s wider infrastructure development programme.

This initial deal intends to ‘pave the way’ for a final investment decision by EDF, supported by China General Nuclear Corporation and China National Nuclear Corporation, later this year. It guarantees that lenders financing the construction of the plant will be repaid up to £2bn, irrespective of project performance. The deal therefore transfers some project risk to the Government – and ultimately the taxpayer – in return for a fee. Further guarantees might be available should EDF meet certain conditions and subject to further government approvals. However these figures could be dwarfed by the potential payments to the operator through the Contract for Difference, which guarantees the final price for the electricity that Hinkley Point C eventually produces. The Government has clearly taken the view that these guarantees are part of the price that needs to be paid to induce the private sector to begin the task of replacing the quarter of UK electricity generating capacity due to be retired in the next 10 years – and, in particular, to secure nuclear as part of that mix. There are many who do not share the Government’s faith in the project. Not only are they sceptical about the timetable – similar reactors in France and Finland are way behind schedule – they also raise concerns about the national security implications of involving the Chinese in a critical part of UK infrastructure. Moreover, they point to reports from the IEA and NEA that the price the UK government is prepared to guarantee would land UK consumers (who bear the costs of the subsidy) with the highest nuclear prices in the world. Despite government guarantees and the Contract for Difference, EDF is allowed to achieve a 10 per cent return on investment. This is leading some to ask why Government does not invest directly, using its ability to borrow long-term money at very low rates. Hinkley is the latest of a series of strategic infrastructure projects, with government involvement, whose rationale and evidence base have been embroiled in intense controversy – other examples include High Speed 2, expansion of aviation capacity in the South East, and the Thames Tideway. None of this is surprising if one allows for the incentives the British political system places on infrastructure policymaking, which generally run against informed debate and decisions. As Sir John Armitt noted in one of our recent seminars “we do not spend enough time at the front end [of infrastructure projects] thinking about … the why question; we love to get to the what and the how”. Our research suggests that the problem is amplified by a shortage of institutions that effectively engage experts, interest groups, and local communities in well-informed discussions about policy options, which might pave the way for politicians to make decisions that might command wider consent. The UK’s historical record on investment in nuclear power is anything but impressive. Half a century ago, the UK embarked on the construction of five nuclear power stations to a newly developed British design, the advanced gas-cooled reactor. The stations were subject to severe delays and cost overruns, and the much publicised export potential of the new reactors design never materialised. Sizewell B, the UK’s most recent nuclear station, was also supposed to be the first of a new fleet of reactors, but changes in gas prices undermined the case for a nuclear renaissance. If we do not change the way we make policy decisions around energy (and infrastructure more widely), there is a good chance that we might see history repeat itself.
Cameron government
Institute for Government

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