03 October 2016

Hinkley Point C has been given the green light. But Oliver Ilott says the Government’s ‘Value for Money assessment’ is simply not good enough.

Today the Chancellor stated that the UK’s infrastructure decisions would be driven by "long-term economics, not short-term politics". The Value for Money assessment for Hinkley Point C was one of his first opportunities to demonstrate that commitment, showing that the decision to spend £30bn on a new nuclear power station was driven by hard-nosed economic considerations. This opportunity was squandered.

A Value for Money Assessment performs two functions: it informs government decision making, and provides the public with the opportunity to scrutinise that decision making. The Hinkley document is just three pages long. For context, assessment for HS2 is 43 pages long. In fact, even the Government‘s guidance on how to carry out a Value for Money assessment is 54 pages long.

Explain your working

The assessment’s problems do not end with its brevity. The first issue concerns the ‘lump-sum’ cost to consumers:

‘The total cost over the whole CfD [Contract for Difference, Hinkley’s subsidy arrangement] has been estimated at £11-21bn (2012 prices, discounted to 2012).’

There is no explanation of why 2012 prices are used rather than 2016 prices (which would make the figure quoted around £1bn larger), or why there appears to be such a difference between the figures offered here and the figures offered by the National Audit Office, who estimate the total cost to be closer to £30bn.

Even at these prices, Hinkley could very well still represent good value. A crucial question would be whether it was preferable to the alternative sources of low carbon electricity. And the assessment does compare the proposed nuclear plant with the cost of onshore wind, offshore wind, solar power, gas, and carbon capture and storage.

But the document risks making Hinkley’s competitors look more expensive than they actually are. It quotes an upper bound for the cost of offshore wind in 2025 as £132/MWh, when the latest round of auctions produced two offshore wind projects for £120/MWh and £114/MWh, with costs expected to fall further by 2025. The same auction produced onshore wind projects for £80/MWh and £82.50/MWh, but the Hinkley assessment gives an upper price of £90/MWh. It also is not clear whether government has discounted the figures for other technologies to 2012 prices, to make them properly comparable with the price of £92.50/MWh that it quotes for Hinkley.

The Government may have sound reasons for using these numbers, but we do not know them. There is no explanation of the evidence base for them, and the three-page document has no references, links or footnotes to help us find it.

Missing calculations

Then there are the figures missing from the document altogether. When comparing between technologies, the document fails to account for the fact that subsidy contracts for wind or solar tend to last 15 years, while Hinkley’s will last 35. Any thorough comparison of the relative value of these technologies would include the cost of the increased risk to the consumer over the longer Hinkley contract.

Elsewhere, calculations that might show Hinkley in a favourable light are also missing. One argument made for Hinkley is that, unlike these other low-carbon technologies, it can provide baseload power. This means that it can generate power consistently, not just when the wind blows or the sun shines. This argument resurfaces in this document, which notes that its analysis:

“does not fully capture the cost of a like-for-like replacement of HPC as a provider of firm or ‘reliable’ capacity out from the 2020s to the 2080s”

It is not clear why the Government has not attempted to give an estimate for these potential benefits. The Committee on Climate Change published its own estimate of such effects last year.

Is Hinkley good value? We can’t say

The assessment does have some positives. It is not a total whitewash, including analysis showing that delaying Hinkley by three years and filling the gap with “more gas” would save £3.2bn. The Government has not published its working, so we can’t assess the quality of this analysis, but it is precisely the kind of content that an assessment ought to provide. The Government has also published the contract for Hinkley (451 pages) which does provide more detailed information about the content of the deal, although makes no comment on its value.

It may be that Hinkley is good value for money. The point is that – on the basis of this assessment – we can’t know. The value of paying £30bn over 35 years cannot be adequately captured in just three pages. If the Chancellor wants to demonstrate that he is making infrastructure decision on the basis of “long-term economics, not short-term politics”, he will need to get a grip on how government assesses value for money.