The Hinkley Point C case: is nuclear energy expensive?

Discussions about the application of nuclear energy as part of the solution to the climate/energy challenge often falter on the perceived…

Written by

Joris van Dorp, MSc.

December 23, 2019

UPDATE: I’ve been getting feedback asking about how the methodology I employ in this article would be applied to renewable energy sources, for comparison. I added a section to the end comparing nuclear and offshore wind energy.

Discussions about the application of nuclear energy as part of the solution to the climate/energy challenge often falter on the perceived high costs of nuclear energy.

Dutch talk show host Jeroen Pauw casually said that it is “terribly expensive” in his broadcast on 31 October and Pieter Boot, energy expert at the Netherlands Environmental Assessment Agency, sanctioned the exclusion of nuclear energy from the klimaatakkoord (The Dutch national climate policy law) with the words: “Nuclear energy has become too expensive” .

Like many nuclear opponents, Boot points to the Hinkley Point C project in the United Kingdom, where two nuclear power plants are being built whose costs are higher than initially estimated.

In this article we will take a closer look at Hinkley Point C and the question of whether this project is really as expensive as is claimed. First, we discuss the nature and origin of this type of nuclear power plant, then the economy of the project and finally the future of nuclear energy in Europe.

What the Brits are building

Two nuclear reactors of the type “EPR” (European Pressurized Reactor) are currently being built at Hinkley Point. The design was developed by a consortium of the French company Framatome and the German Siemens. These two reactors are the first part of a national plan, initiated in 2008, to build 16,000 MW of new nuclear power plants in England to support the UK energy transition to a clean, reliable and affordable energy system, with drastically lower CO2 emissions.

EPR’s under construction (2 x 1600 MW), United Kingdom, Hinkley Point

Compared to earlier designs, the EPR includes new features to meet the stringent safety requirements of the German government in particular. For example, there is a double concrete building shell to protect against potential aircraft impact, and there are no fewer than four different types of independent cooling systems provided. These cooling systems are there to prevent accidental damage to the reactor core (and therefore the risk of radioactive material escaping into the environment) in case of a natural disaster, equipment failure or human error.

Despite this technological complexity, EPR was intended to be more economical than its predecessors for the following reasons:

Two EPRs in operation (2 × 1600 MW), China Taishan

EPR’s are currently being built in Finland, France and England. Two further reactors have recently begun operating in China. India is negotiating with EDF for the construction of six EPRs and the French government has also recently decided to investigate the construction of six more EPRs.

The costs of Hinkley Point C

After seven years of negotiations and revisions, the British government decided in 2016 to execute the Hinkley Point C project (hereinafter: HPC). The costs were estimated at around € 20 billion. For that price, French and British companies would take care of the construction, including the development of the necessary industrial chains and trained staff in the UK after thirty years of nuclear industrial stagnation in the country.

The cost estimate has since been adjusted up to 25 billion euros. This is considerably more than the original estimates made during the design of the EPR at the turn of the century. The construction of two EPR’s was estimated at the time to be at most 7 billion euros (see slide 51).

Let us look briefly at the causes of the cost increase at HPC. These include:

To build HPC despite the aforementioned obstacles, it was agreed that the UK government would guarantee a CfD power price of 11.3 €cents/ kWh (in current prices) for 35 years adjusted for inflation. The project would be funded entirely by EDF and its investors — there would be no money provided up-front by the UK government.

This guaranteed price, or strike price, as it is known, is much higher than the original estimate of the French electricity company EDF, namely 5.5 cents / kWh (at current prices). Moreover, it is higher than the current price of electricity on the wholesale market, which is only 5 cents / kWh. In that regard, we might conclude that HPC indeed appears to be “terribly expensive.”

And what are the benefits?

To find out whether HPC at 25 billion euros really is expensive, we have to compare the costs with the benefits. HPC consists of two EPRs with a combined net capacity of 3200 Megawatts. On an annual basis they will together supply 26 billion kWh to the British electricity grid. That is enough power for almost 9 million households. (In the Netherlands, HPC could therefore provide all households with CO2-free electricity.) HPC has a design life of 60 years, with the possibility of extending it to at least 80 years. HPC will supply more than 1500 billion kWh of electricity for 60 years. This yields a construction cost per kWh of 1.6 cents.

The operating costs after commissioning of the plant are estimated at between 1.5 and 2.5 cents / kWh. This includes all running costs during operation, including personnel costs, fuel costs, permits, insurance, maintenance, taxes and premiums to the decommissioning fund and the processing and, importantly, the ultimate disposal of nuclear waste.

The construction costs and the operating costs together are therefore at most 4.1 cents / kWh. That is by no means the CfD strike price of 11.3 cent that the owner of HPC will get. What happens to the 7.2 cent / kWh difference? Well, this will be paid as a premium (interest, dividend or other forms of profit distribution) to the investors and lenders of HPC, namely the (pension) funds and (state) participations of France and China who are the owners of the project. (The UK government had prohibited itself from participating in nuclear energy investment for antinuclear political reasons, though that policy appears to have softened in recent years, as noted in the NAO report on HPC, which we'll get to below.)

If the price of 11.3 cents continues to be realized even after the expiry of the 35-year CfD, the owners will earn another 100 billion euros (7.2 cents x 1500 billion kWh) over the 60-year lifetime of HPC, in addition to the recovery of the original investment of € 25 billion and the 60 year running costs. That 100 billion is the compensation for the risk that investors take to finance and operate HPC for 60 years.

Expensive, and cheap?

So is HPC “terribly expensive”? That depends on the perspective one takes. From the investor standpoint, one could say that HPC is indeed expensive when compared with other recent nuclear projects. After all, HPC costs almost 8 billion euros per GigaWatt, while in China, Russia and South Korea a comparable project costs less than 3 billion per GW.

Yet, despite the relatively high construction cost, the total costs per kWh for investors are still low. That 4.1 cents / kWh is comparable to the costs of a fossil power plant and much lower than the costs of the cheapest equivalent (stable, independent) combination of solar panels and wind turbines plus storage with batteries and hydrogen, the costs of which can run up to 50 cent / kWh . When compared to other options — particularly other stable zero-carbon options — HPC is “terribly cheap”.

Even by assuming “radical transformation” of the energy system to 100% renewables under very favorable assumptions (such as continuous cost reductions of wind turbines, solar panels and storage systems, the construction of an international electricity network on a continental scale, and the availability of cheap land surface for all equipment), opponents of nuclear energy anticipate a stable supply cost not below 5 cents / kWh in 2050.

As well as the investor’s perspective, what about that of consumers and of society as a whole? For electricity consumers — all those households, institutions and companies that receive an energy bill every month — the price of HPC is relatively high: comparable to the cost of solar rooftop electricity (which costs at least 11 cents / kWh, but which appears cheap to owners because it exempts them from paying high retail energy taxes and surcharges worth up to 14 cents / kWh). But the societal cost of HPC is low because the costs that society experiences are exclusively the costs for building and operating the plant, not the interest and dividends, because those are returned to society.

The HPC owners will earn a lot of money, although they have to wait a long time for it. These owners include pension funds and state holdings. Most of the money that the British consumers will pay for HPC electricity — about two thirds — goes directly back to society in the form of pensions, public spending and so on. Only a third goes to actually building, operating, fueling and eventually decommissioning the HPC nuclear power plant (see the pie chart below).

Expensive for consumers, but cheap for society: that was the gist of the conclusion of the UK National Audit Office (NAO). In its audit of the HPC project, the NAO concluded that up to six (!) HPC's could have been built for the 11 cents / kWh of the HPC CfD, if the British state had financed the project itself with cheap government bonds.

The NAO writes: “ If we assume the government financed the project and required a 2% return (nominal, equivalent to its borrowing cost), construction costs could overrun by between 400% and 600% to the total cost of the HPC deal.”

This 400 to 600 percent corresponds well with the difference between the actual building cost share estimated in this article and the interest / dividend share of the HPC price, namely 1.6 cents / kWh and 7.2 cents / kWh respectively on the total of the guaranteed price of 11.3 cents / kWh.

Extract from the audit report on HPC from the UK National Audit office, NAO

The Audit Office also presents its conclusions graphically, namely in the following chart:

Extract from the audit report on HPC from the British Court of Audit, NAO

The graph also indicates (the left of the curve dips below zero) that no CfD would have been needed if the British government had financed the project. Moreover, if the government would have been the owner, it would be the beneficiary of the plants multibillion earnings, rather than the current French and Chinese state owners.

The following pie chart shows the structure of the price for the HPC project, containing estimates of the destination of the money that consumers will pay for a megawatt-hour of electricity from HPC (divide the numbers by 10 to get the price in cent / kWh.)

Destination of the price that will be paid per MWh (1 MWh = 1000 kWh) for HPC power. About two thirds is paid to investors, only one third is needed for the construction, operation and dismantling of HPC.

So HPC is advantageous for national prosperity, despite the large size of the investment and the high CfD price. This explains why the British government wants to use nuclear energy as part of its climate/energy. Moreover, the British people benefit from low-cost, stable, zero-carbon electricity, without air pollution.

The Eastern European member states also want to use nuclear energy for this reason, and therefore oppose attempts by Germany, Austria and the Greens to exclude nuclear energy from the European climate / energy policy.

In the future

The British government knows that — despite the large size of the initial investment — every nuclear power plant will sooner or later become a huge cash cow and that achieving a fossil-free society without nuclear energy is not credible. That is why it will probably want to build on the experience with HPC and ensure that the human capital and industrial supply chains that are finally being built up will not be lost again, but will be further developed and employed to serve people and nature.

Many of the costs for HPC — setting up the required supply chains and training a new generation of technicians and engineers — are one-off. The more plants that are built, the lower the costs become, just as it was when the first wave of nuclear power plants were built in the 60s and 70s, and just as it does with all industrial activities that humanity develops as long as they are not sabotaged.

A modest European construction program to use EPRs to replace the current nuclear reactor fleet would — according to the European Commission — be enough to halve average plant construction costs compared to the headline price of HPC, namely to less than 4 billion per GW.

In its audit report for HPC, the NAO also issued suggestions on how the government might go about shifting more of the benefits of future nuclear energy projects from investors back to consumers. For example, the electricity price may be lowered by shifting part of the project risk from the contractor to society, which leads to lower capital costs (interest and dividends). Since the project risk for the construction of new nuclear power stations is mainly political, it would not be illogical to shift more of that risk to the public, in the spirit of “the polluter pays”. A nice recent explanation of this manoeuvre (known as the RAB model) is here.

Just as elsewhere in Europe, controversy and confusion about climate and energy policy also prevail in the UK. It is noticeable that the fossil industry is working together with the environmental movement out of financial self-interest to thwart the development of nuclear energy. After all, as long as climate activists continue to focus on wind and sun, refusing to heed public scientific institutions that argue that an expansion of nuclear energy use is necessary to avoid a drastically higher cost of energy in the future, the construction of new nuclear power plants in Europe will be further hampered.

As a result, both the fossil industry and the environmental movement are happy with the abrasive chaos and bankruptcies in the Western nuclear sector, and the ongoing shutdown and replacement of operating nuclear power plants by subsidized fossil fueled plants and green energy.

And the successes of nuclear development in Russia and China are roundly ignored.

Technicians are working on the “fourth generation” fast breeder reactor type BN-800 in Russia that was put into operation in 2016. With a capacity of 880 MW, this reactor supplies almost twice as much power as the nuclear power plant at Borssele, but with only one hundredth of the uranium consumption and with (even) higher safety performance.

Yet sooner or later, nuclear energy will be embraced again in Europe. In addition to the favorable impact on CO2 emissions, the other environmental and economic benefits of modern nuclear energy technology are simply too big to ignore.

The rest of the world will certainly not ignore them, because only with the help of nuclear energy technology is it feasible to produce fossil-free and emission-free electricity, heat and synthetic fuels that are cheaper (without subsidies) than their fossil versions.

I therefore think that ultimately not only energy experts, but also the wider public and politicians will come to realize that a fossil-free energy system without nuclear energy is — in the words of the Netherlands Environmental Assessment Agency — “hardly conceivable”, let alone desirable.

UPDATE: I’ve been getting some feedback about how the methodology I employ in this article would be applied to renewable energy sources like offshore wind energy, and if it’s possible to compare the economics of Hinkley Point C with recent UK offshore wind farm (OWF) tender results. The answer is yes of course, but since wind energy (and solar energy) are not stable supply options, their cost is not limited to their construction, operating and decommissioning cost. For offshore wind, costs incurred by the need to provide backup supply when there is no wind, and the extra transmission costs incurred by needing to transport energy from windy regions to quiet regions are part of the cost of using wind energy.

To hash all this out in detail would require another article (which I might write in future) but in summary: the least-cost way to obtain a low-carbon stable supply package based on wind energy that is effectively comparable to nuclear energy is to combine the wind energy with natural gas turbines fitted with CCS technology (Carbon Capture and Storage). Doing so causes an increase in social cost of at least 4 ct/kWh (€40/MWh) for the wind energy. I also added a backup cost markup to the HPC, since nuclear power plants also require a type of (non-energy) backup known as reserve capacity.

For clarity, I’ve collected the data in this article and put it into an infographic that attempts to show how the CfD strike prices for HPC and for recent UK offshore wind tenders can be translated into actual comparable social welfare costs.


Joris van Dorp, MSc.

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