New nukes in the UK - part 2

So EDF won’t (and, by itself, can’t: it’s bankrupt) take construction risk on nukes any more (Part 1).  But it needs to parlay its supposed expertise into anything that can defray its appalling future liabilities and monetise its sunk costs - at other nations’ expense.  Hence, its relentless pressure on HMG, (a) to proceed with Sizewell C, and (b) do so on a completely different financial footing to that of Hinkley Point C.  Oh, and (c) HMG must put its hand in its pocket right away to fund the ongoing engineering, because “EDF has almost run out of money”.  And HMG has agreed.

The new finance basis will be “Ratable Asset Base”, whereby approved developments call on guaranteed periodic payments from, well, taxpayers ultimately**, during the construction phase.  The logic is, this reduces risk to the point where cheap institutional finance will swing in, attracted by the state-backed cash-flow stream.  By “reducing the cost of capital significantly” vs the “commercial” margin EDF claims it needs to charge in return for taking construction and cash-flow risk on (e.g.) HPC, the overall cost – which was always to be borne by UK bill-payers anyway, if over many more decades – is brought down by a noticeable amount.  In capital intensive sectors, attracting the least-cost capital has always been vital (true).  As a throwaway line it is added that RAB is how loads of big infrastructure projects are financed in the UK and elsewhere (true): and of course almost the whole of the US utility sector has been built on this basis (also true).  How heartening!

Heartening for the French, maybe, but open to many heavyweight challenges.

• EDF, having just been re-nationalised, is now essentially the French state, which can raise money (almost) as cheaply as any western nation.  If they are so strategically keen on SZC, let ‘em get on with it.  They already have a put option for the project, complete with UK-guaranteed electricity price.
• Yes, RAB is used in big infra projects.  The difference is, those are traditionally based on conventional technology, proven construction methods, and low strategic risk.  SZC?  Pull the other one: it comes from a stable with truly appalling previous in these matters.  To trust them to get their act together on this one, in the face of all history, is some kind of madness.  RAB as ‘conventionally’ practised is not at all suitable for nukes: ask the Americans, who’ve tried it.
• In particular, tax-payers are open to the following scenario (as HMG freely admits).  SZC construction gets underway, and taxpayers make regular payments, year by year.  For the first N years, the work is all civil engineering anyway (HPC is still in the civils phase, five years after commencement), and the construction risks are moderate (though by no means nil) – so the chances are, the payments will properly fall due, more or less.   After several billions of this and a monstrous scar inflicted on the East Anglian countryside + precarious heritage coastline, EDF says that’s it, we’re stuck - we need a lot more £££, in order to finish the project.++  HMG says ‘no’.  EDF declares its project affiliate bust, and says, maintenant mes braves, whatchagonnado?  There is no answer to this question, short of having the French government guarantee construction which, naturellement, it refuses to do: that’s the whole point!  So the UK taxpayer bears the ultimate risks of construction, delay and budget overrun, as part of its exposure to (it bears repeating) an organisation that is legendary for its grotesque, world-scale failures in all these regards.  
• It’s not at all clear big institutional money is looking for the kind of home represented by SZC.  Nuclear risk lies at the heart of this, despite attempts to dress up the financial proposition as just another annuity stream.  In particular, everyone knows the Big Contract between HMG and EDF will be secret.  So the institutions will also ask for secret protections – and they won’t take their sharpest pencils to the rates they charge, either – if indeed they are interested at all. 

This is just the headlines of the RAB stuff:  I’m not even talking about the massive strategic issues of (e.g.) China having a 20% stake that needs squaring away; and whether a large chunk of deeply uncertain nuclear capacity commencing probably 10 / 11 / 12 years from now (who’ll ever have a firm handle on that?) can contribute meaningfully to a national electricity requirement which places an ever greater premium on reliability, flexibility, and certainty in both these vital dimensions.   Still less am I addressing the plethora of SZC- and East Anglia-specific environmental issues involved, which themselves are multi-dimensional and acute.

And yet, HMG ploughs on regardless.  As we said at the end of Part 1:  FFS, why?   Some suggestions towards an answer in Part 3 …

ND

___________

** I say ‘ultimately taxpayers‘ but in the first instance it will probably be electricity bill-payers.  Not a huge amount of difference, in practice. 

++ Ample proof of EDF’s approach to contractual obligations comes very recently from this FT revelation: 

EDF is in negotiations with the British government over penalty clauses in [the] agreement struck in 2013 to finance the building of [HPC]. The subsidy deal guarantees EDF a price [for] electricity it produces for the first 35 years of its life … Penalty clauses … reduce the 35-year term if Hinkey is not generating electricity by May 2029 [by] one year of guaranteed payments for every year of delay up to 2033. If the delays extended beyond that date the government has the option to terminate the subsidy contract. EDF … has repeatedly pushed back its completion date while costs have spiralled. In the latest setback, EDF warned … that the first of Hinkley’s two reactors would not be completed until June 2027 …. [and] the company cautioned that there was the possibility of a further 15-month delay to September 2028, adding that date could slip again …