Q&A: Nuclear strike price
- 21 September 2015
- From the section Business
The government finally agreed a nuclear strike price with French power company EDF in 2013. 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.
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 government 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), or £89.50 if EDF develops 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.
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 £44/Mwh. If the wholesale price remains at this level, then EDF will receive an additional £48.50/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.
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 for just Hinkley is estimated at £24.5bn. 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 decided long ago 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 be higher than they would otherwise be. Conversely, if it is above the strike price, then bills would be lower.
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 - and coal and gas - power stations shutting down. 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, it says, 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.