The Hinkley Point controversy

A third nuclear plant at Hinkley Point could cost £24.5bn to build and engineers have expressedconcern about the technology involved. So why stick with it? Matthew Partridge investigates.

What's going on?

A few weeks ago Thomas Piquemal, the finance director of EDF (lectricit de France), resigned over the company's plans to build a 3,200MW nuclear power plant at Hinkley Point in Somerset, next to two existing plants. This week, a union representative on the EDF board has said that he will vote against the plans to build the reactor, while in an internal document leaked to the Financial Times, some of the company's engineers have expressed concerns about the technology involved. So far, EDF still officially backs the project last month, EDF CEO Vincent de Rivaz told a House of Commons committee that it will "clearly and categorically go ahead".

Yet, as The Guardian's Nils Pratley notes, "de Rivaz was obliged to concede in the next breath to MPs on the energy select committee" that "he cannot say when an investment decision will be made". While the French minister of the economy has said that a final investment decision will be made next month, it's "unclear whether this deadline' has any greater force than the others that have come and gone". Meanwhile, many question if the deal makes sense for the British taxpayer.

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Why is it being built?

The government argues that Hinkley Point C, first proposed in January 2008, is the most cost-effective way to deliver low-carbon energy, providing 7% of the UK's energy needs while saving 600 million tonnes of carbon over its 60-year lifespan. Several experts have warned that without further investment, the UK's demand for electricity will outstrip supply within the next few years, meaning possible blackouts.

In January, a report on Britain's future energy needs by the Institution of Mechanical Engineers (IMechE) claimed that the closure of all coal power plants, which currently produce 22% of electricity, by 2025, along with the closure of ageing nuclear plants, means demand could outstrip supply by as much as 55%.

How much will it cost?

Building costs are expected to come to at least £24.5bn, with £6bn born by China General Nuclear Power Group. To make the project viable, the UK government has guaranteed that the consortium will be paid at least £92.50 per megawatt hour of electricity, adjusted for inflation, over the next 35 years. Depending on how much electricity prices rise, the government could end up paying up to £20bn in direct subsidies, as well as extra in loan guarantees.

This would make it the most expensive plant in the world, and if cost overruns are similar to those in France, the price tag could reach £40bn, reckons think tank Chatham House. Other developed countries pay only $60-$80/mWh for nuclear energy, roughly half the price guaranteed by the government, according to the Institute of Economic Affairs.

Why so expensive?

Around £2bn of the cost is due to a decision to build a concrete shell that could sustain a direct hit from ajet. But most of the extra costs are because Hinkley Point C is designed around "third-generation" European Pressurised Reactor (EPR) technology. In theory, this should "generate more electricity from less fuel and need less downtime for maintenance", says New Scientist. It should also "cut the risk of major accidents".

However, critics argue that existing technology is safe enough and warn that the four EPR reactors currently being built (two in China and one each in France and Finland) have all been delayed. Indeed, the French reactor was meant to be completed by 2012 but will now not be ready until at least 2018. Last September, EDF had to push Hinkley's 2023 completion date back by two years, though the project has to be finished by 2033 to receive subsidies. HSBC analysts sum up the critical view when they say that EPR is "too big, too costly, and still unproven".

So why stick with it?

High upfront costs are misleading, says the government, because the deal also includes infrastructure that will allow similar plants to be built in the area (three more are planned), which could cut the cost of future plants. However, argues Bronwen Maddox in the Financial Times, "it would make more sense to buy smaller nuclear stations of proven design or gas-fired ones, while waiting for new nuclear models to get established and for the volume of orders to push the price down".

Meanwhile, Peter Atherton from investment bank Jefferies suggests that using an established design from Japan's Hitachi would enable the guarantee to be cut to £70/mWh, slashing £17.5bn from the bill. Atherton also estimates that 50,000 MW of gas capacity could be built for the same cost as Hinkley Point C, though gas generation is far more polluting and would make it much harder to meet environmental targets. Ultimately, much of this is about politics "the British government would face huge embarrassment if Hinkley Point was abandoned or postponed", says The Independent's John Lichfield.

Is EDF in financial danger?

Despite the lavish subsidies, there have been fears thisdeal could blow up in EDF's face. "There are other calls on its capital and resources, not least France's nuclear power stations, which require an expensive upgrade," says Nils Pratley in The Guardian. EDF already has high debts and S&P has warned if the project goes ahead it may downgradeits bonds, currently rated A+. EDF has been unable to convince partners other than the Chinese to fund the upfront costs and these may be in jeopardy, as no written contract has been signed.

EDF's employee shareholders association has warned the deal "could put EDF's very survival at risk", while the French audit office has criticised the project too. But France, which owns 85% of EDF shares, "would discourage EDF from abandoningHinkley because it would end the dream of a nuclear-export industry", says The Economist. Instead, France has hintedthat it could inject more capital into EDF to shore it up.