Q&A: Nuclear strike price

Related Stories

The government has finally agreed a nuclear strike price with French power company EDF. But what is this price and why is it needed?

Nuclear what price?

No-one is talking about a nuclear strike here - Armageddon is not upon us. The nuclear strike price simply refers to the price the government has guaranteed EDF per unit of electricity produced from its proposed new nuclear reactors at Hinkley in Somerset.

nuclear map

Why do we need a strike price in the first place?

Because the government has maintained all along that it will not provide any public subsidies to the nuclear industry. It would not actually be illegal to do so, but the coalition would need permission from the European Union. Any such U-turn would be hugely embarrassing, however, not to mention hugely unpopular.

How does the price work in practice?

In essence, the government has guaranteed EDF a price of £92.50 per megawatt hour (Mwh), so if the market price of electricity falls below this level, the government has in effect said it will make sure EDF receives the difference between the two prices.

The wholesale price of electricity at the moment is about £45/Mwh. If the wholesale price remains at this level, then EDF will receive an additional £47.50/Mwh. In practice, this money will not come from taxpayers (that would count as a subsidy), but from consumers of electricity.

The strike price works the other way as well - EDF has to refund the difference if the price of electricity is above £92.50/Mwh. For example, if the wholesale price is £110/Mwh, then it has to refund £18.50/Mwh. Again, this money goes back to bill payers, not to the government.

The strike price will fall from £92.50 to £89.50 if EDF agrees to develop another new reactor in Sizewell, Suffolk. This simply reflects the fact that EDF's costs will be lower per reactor if it builds two of them.

Hinkley Point C Hinkley Point C is set to take 10 years to become fully operational. It will be made up of two nuclear reactors and will be built next to Hinkley Point A and B.
Sea wall at Hinkley Point C The land will need to be flattened and then the sea wall will be built. After this, excavation work can start to lay the foundations of the nuclear plant including two underground two-mile (3km) tunnels for the cooling water.
Turbine hall The building of the two reactors will be staggered with the first reactor expected to be operational by 2023.
Turbine hall The other aspects of the build include the turbine halls, standby power generators and a pumping station for the cooling water, interim waste storage facilities as well as a visitors' centre.
Workers' campus (artist impression) Workers' accommodation will be built across three sites, with two in Bridgwater and a third on site. Other infrastructure includes building two park and ride sites and developing Combwich Wharf.
View of Hinkley Point C with Hinkley Point A and B in the background The power station is expected to provide up to 25,000 jobs during the lifetime of the project and once built will provide about 900 full-time jobs.

But why the need for any guaranteed price?

Nuclear reactors cost a lot of money, and EDF wants to build two of them. The final bill is estimated at £16bn. Even for a massive company like EDF, this is a huge investment, which makes it inherently risky. For example, if the price of electricity falls, or becomes more volatile, the company could lose a lot of money. And because the plant would take 10 years to build, there is simply too much uncertainty to commit to such a huge investment.

For this reason, EDF needs an added incentive to build the reactors. Knowing it will receive a guaranteed price for the electricity generated at Hinkley provides some kind of certainty that the investment will be worthwhile - in other words, profitable.

For its part, the government has been unable to play different energy companies off against each other, as German power giants RWE and E.On have decided against building new plants in the UK. It has, therefore, been forced to negotiate with EDF. But this doesn't mean EDF holds all the cards - the company is desperate to get Hinkley Point C started so it can serve as a blueprint for similar power stations across the world.

So what does it mean for bills?

Until we know the price of electricity on the open market when Hinkley Point C starts generating power, we simply won't know. If the electricity price is below the strike price, then bills will probably go up. If it is above the strike price, then bills could go down.

It will also depend on the energy mix at the time, in other words how much of your electricity is generated by nuclear power. At the moment, almost 20% of the UK's power is generated by nuclear reactors, but this is likely to fall in the short term as the UK's current nuclear capacity is decommissioned.

This is all very well, but why are we building new nuclear power plants?

Precisely because there will be a shortfall in electricity generation as a result of existing nuclear power stations going offline. The question then is how to make up this shortfall.

The government is committed to renewable energy, such as solar and wind power, but to get enough generating capacity from these sources will take too long, so another solution is needed. In theory, it could simply increase power generation from traditional fossil fuels such as coal and gas, but stringent, legally-binding CO2 emissions targets mean this is not possible.

There is some room for an increase in gas-generated power, but as we import most of this gas, the government has concerns about energy security - it wants us to generate our own power, not rely on others for it.

So, in the government's eyes, that leaves nuclear. And it wants EDF to lead by example, paving the way for other power companies to invest in new reactors in the UK, because two new reactors will not be enough.

More on This Story

Related Stories

More Business stories

RSS

BBC Business Live

  1.  
    MORTGAGES 10:33:
    Mortgage form

    Mortgage lending remained "robust" in July, according to the latest figures from the Council of Mortgage Lenders. Gross mortgage lending rose to £19.1bn last month, the CML said. That's up 7% from the previous month and 15% higher than in the same month last year.

     
  2.  
    INTEREST RATES 10:23: BBC News Channel
    Michael Saunders

    A "fairly major step" is how Michael Saunders, chief economist at Citigroup, describes the news of the split vote on the MPC. But he says we shouldn't fear a rate rise as the economy is in good shape. "Rates will go up in the next six months or so... and will steadily rise from there," he tells the BBC. The pound may rally further as rates rise because of sterling's "incredibly weak" starting point, he adds.

     
  3.  
  4.  
    POUND REACTION 10:10:
    Pound-Dollar

    News of the split vote on the MPC has sent the value of the pound higher, as the minutes suggest a rate rise could happen that much sooner. Against the dollar, sterling climbed to $1.6680, which was up 0.3% for the day.

     
  5.  
    STANDARD CHARTERED Ian Gordon Banking analyst, Investec

    "There appears to be no suggestion by the New York Department of Financial Services of any wrongdoing or breach of regulations by Standard Chartered. What it claims to have identified is a deficiency in a surveillance system at Standard Chartered's New York branch to identify and/or flag certain "high risk" transactions... We estimate a 1-2% adverse earnings impact."

     
  6.  
    INTEREST RATES 09:52:

    For the majority of the Monetary Policy Committee, "there remained insufficient evidence of inflationary pressures to justify an immediate increase in Bank Rate", the minutes showed. They noted that the latest Inflation Report had inflation reaching the 2% target only at the end of a three-year forecast period. Economic growth is likely to slow slightly, and wage growth remains weak, they said.

     
  7.  
    INTEREST RATES 09:44:

    For Martin Weale and Ian McCafferty, "the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up", the MPC minutes show. "Since monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them."

     
  8.  
    INTEREST RATES 09:32:

    The MPC minutes show that Martin Weale and Ian McCafferty both voted to raise interest rates to 0.75% from 0.5%. It's the first time the MPC's vote has not been unanimous for more than three years.

     
  9.  
    INTEREST RATES Breaking News
    Bank of England

    The Bank of England's Monetary Policy Committee voted 7-2 in favour of holding interest rates at 0.5% earlier this month, minutes have shown.

     
  10.  
    MARKET UPDATE 09:22:

    Shares in Balfour Beatty have fallen more than 6% after the company rejected the latest takeover proposal from rival Carillion. Glencore shares are up 0.4% after the commodity trader and miner reported better-than-expected first half profits.

     
  11.  
    MORTGAGES 09:13: BBC Breakfast
    BBC Breakfast

    The expectation that interest rates are going to start rising in the coming months has led to a surge in homeowners remortgaging. The Money Advice Bureau says there was a 21% spike in remortgaging applications last month. Kerry Rowling from Marble Mortgages told BBC Breakfast it's worthwhile putting the time in to find a good rate. And she says there are still many fee-free deals around.

     
  12.  
    FRENCH ECONOMY 09:02: BBC Radio 4

    The Today programme has been looking at why the French economy has ground to halt, with zero growth over the past six months. "The main drag on French growth is the lack of investment," says Eric Chaney, chief economist at AXA Group. "Companies in France do not want to invest because of very high taxation, very tough regulation and a lot of uncertainty about government policy."

     
  13.  
    AMAZON ROW 08:48: Radio 5 live
    Amazon screen shot

    Amazon has been criticised recently over its treatment of publishers. Economist John Kay says on Wake Up to Money the traditional publishing business is on the way out. "It used to be a complicated business getting a book into the hands [of the public]," he says, "it's not any more." Authors will get more proceeds from the books, he says, and Amazon won't have a monopoly.

     
  14.  
    GLENCORE BUYBACK 08:39:

    Commodity trader and miner Glencore has said it will buy back $1bn of shares over the next six months. The company also reported an 8% rise in first half earnings to $6.5bn (£3.9bn), beating analysts' estimates.

     
  15.  
    MARKET UPDATE 08:24:

    After two days of strong gains, the main European stock markets have inched lower in early trade.

    • The FTSE 100 is down 11.11 points at 6,768.20
    • Germany's Dax index is 14.86 points lower at 9,319.42
    • In France, the Cac 40 is down 9.57 points at 4,244.88
     
  16.  
    ARGENTINA DEBT 08:20:
    Cristina Fernandez

    President Cristina Fernandez has proposed laws that will push bondholders to swap defaulted debt for new bonds governed by Argentine law, to try to avoid a US ruling that prevented her government from paying some creditors. Argentina entered default last month after a New York court blocked an interest payment of $539m owed to holders of bonds issued under US laws that was restructured after the country's record 2002 default.

     
  17.  
    INTEREST RATES 08:02: BBC Radio 4

    The Bank of England's Monetary Policy Committee (MPC) has voted unanimously to hold rates at 0.5% for the past three years. Peter Warburton, who sits on a 'shadow' MPC, organised by the Institute for Economic Affairs, tells the Today programme that it looks like the consensus is beginning to crumble, although the latest MPC minutes could still show a 9-0 vote in August.

     
  18.  
    Via Twitter Adam Parsons Business Correspondent

    tweets: "Diego Hernández to become Chief Executive Officer of FTSE100 miner Antofagasta"

     
  19.  
    HEINEKEN RESULTS 07:35:
    beer

    Heineken beat analysts' forecasts for its first-half results, although along with Carlsberg it said it sold less in Russia. The Central and Eastern Europe business was hit by bad weather and floods. Operating profit before one-off items rose 9.6% in the first six months of the year to 1.45bn euros ($1.93bn; £1.16bn),

     
  20.  
    CARLSBERG RESULTS 07:23:
    beer

    Danish brewer Carlsberg has said annual profits will drop because of western relations with Russia. The country generates 35% of operating profit but Russia could enter recession this year. "The overall performance in the second quarter looks fine, but they are downgrading their guidance due to the macroeconomic uncertainty in the Eastern European region. So it is a mixed bag," analyst Morten Imsgard from Sydbank said.

     
  21.  
    BALFOUR BEATTY 07:18:

    Balfour Balfour said it rejected Carillion's latest offer because it failed to address "two key concerns". It said there were "considerable risks" associated with the proposed business plan. It also objected to Carillion's intention to halt the planned sale of Balfour's Parsons Brinckerhoff business in the US, "at a point when it is reaching a successful conclusion".

     
  22.  
    BALFOUR BEATTY 07:08:
    Balfour Beatty worker

    Balfour Beatty has rejected the latest takeover bid from rival Carillion. The offer was sweetened on Tuesday for the third time, valuing Balfour at more than £2bn. But Balfour said the proposal was "not in the best interests" of its shareholders.

     
  23.  
    BHP BILLITON 06:57: BBC Radio 4
    BHP Billiton logo

    On Tuesday, mining giant BHP Billiton announced plans to spin-off billions of dollars worth of assets into a new company. Elaine Coverley, head of equity research at Brewin Dolphin, told the Today programme that it's a sign that shareholders in the sector are demanding more discipline from management and seeking better dividends.

     
  24.  
    STANDARD CHARTERED 06:44: Radio 5 live
    Standard Chartered

    Elaine Coverley, head of equity research at Brewin Dolphin is on Wake Up to Money, this time talking about Standard Chartered. Standard Chartered has agreed to pay $300m (£180m) to New York's top banking regulator for failing to improve its money laundering controls. "It's a blow," she says. "In the past the management were very well respected."

     
  25.  
    JAPAN EXPORTS 06:31:
    Tokyo port

    Japan's exports grew in July for the first time in three months, figures have shown. Exports were up 3.9% from a year ago thanks to higher shipments of cars and electric machinery. However, imports rose by 2.3%, largely due to purchases of oil and gas. This meant the trade deficit came in at a larger-than-expected 964.0bn yen ($9.4bn; £5.6bn) for the month.

     
  26.  
    BALFOUR MERGER 06:16: Radio 5 live

    Elaine Coverley, head of equity research at Brewin Dolphin is on Wake Up to Money. Carillion is back with improved terms to buy Balfour Beatty. "It is getting more hostile," she says. Balfour Beatty shareholders "need to petition the board to look at this offer much more closely", she says.

     
  27.  
    INTEREST RATES 06:10: Radio 5 live
    Bank of England

    A rise in interest rates is "long overdue", economist Peter Warburton tells Wake Up to Money. The minutes from August's meeting of the Bank of England's Monetary Policy Committee are out later and could show some members favoured a rate rise. Mr Warburton thinks several economic indicators suggest rates should already have gone up.

     
  28.  
    PALLADIUM PRICES 06:02: Radio 5 live

    Jim Slade, a director of European Exhaust & Catalyst, is on Wake Up to Money talking about palladium, which is used in catalytic converters. The price of palladium has risen by 25% this year. "There's a lot of debate about Russia and whether they have a huge stockpile or whether it's depleted," he says.

     
  29.  
    06:00: Nick Edser, Business reporter

    Good morning. You can email us at bizlivepage@bbc.co.uk and tweet us at @bbcbusiness.

     
  30.  
    06:00: Howard Mustoe Business reporter

    Hello. Today we can look forward to minutes from the Bank of England's Monetary Policy Committee, plus company results and analysis. Stay tuned.

     

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.