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Hinkley Point C green-lighted as market debates strike place

19 Mar 2013 14:15:36 | edem

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The UK government granted planning permission on Tuesday for the first new nuclear plant to be built in the country for 18 years.

However, market participants have questioned the practicality of a "strike price" for EDF Energy's 3.2GW Hinkley Point C at a level below £100 (€117)/MWh.

The market has suggested that the strike price around which the contract for difference for output from the project will hinge will be around £97/MWh. But with the utility expected to announce a deal with the UK government imminently, one power trader has suggested that £97/MWh is "too low" to build the power station.

"Investment return does not mesh with £97/MWh - this is a cause for concern," he said. "If this was economical, SSE, E.ON, RWE, Vitol and others would come into the project and see it as an opportunity. Their absence signals the investment is too risky."

The only UK-based utility to become involved with the nuclear project was Centrica. It has since dropped out, citing the project's cost increases (see EDEM 4 February 2013).

"Why did Centrica leave the consortium? I think the real reason is it has no strategic requirement to be generating fixed price electricity," said Lakis Athanasiou, an independent utilities analyst. "These guys like generation with low production costs, and sell at market price to their retail arm to buy and sell it on. Operating on a fixed price doesn't play on that at all."

Contingency

Sources have suggested that the low strike price makes it likely that a substantial contingency clause will be included in the agreement to allow for cost overruns (see EDEM 14 February 2013).

Other observers have questioned whether the full terms of the agreement will be made public, despite assurances that the British parliament will be made aware of the details of any deal.

There have also been questions over whether EDF will be able to deliver the plant on time and on budget. The cost of the company's Flamanville nuclear project in France has ballooned by €2bn (see EDEM 21 January 2013).

However, other participants have suggested that a lower price would be sufficient. Berenberg equities analyst Robert Chantry has estimated that a strike price of £85-90/MWh plus inflation is needed, given the potential for cost and time overruns.

"This is £100-105/MWh nominal by 2020," he said. "As to whether EDF could deliver on time, I think it's anyone's guess. On the one hand, these are complex projects and their track record recently has been poor. On the other hand, they should have learnt something from Flamanville and have a long planning period in the UK."

Hinkley Point C was given the green light by UK energy secretary Ed Davey on Tuesday.

"This planned project adds to a number of new energy projects consented since May 2010, including wind farms and biomass and gas-fired power stations," Davey said. Katie McQue

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