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A Cambridge view on the new build decision

last modified May 07, 2014 10:54 AM

Dr Simon Taylor, University Lecturer in Finance at Cambridge Judge Business School and is Director of the University of Cambridge Master of Finance (MFin) degree, has written a blogpost in response to the decision about Hinkley Point:

- CNEC's response, written by Tony Roulstone:

After more than six years of preparation, it is very good news that the Government has agreed with EDF Energy and  its other investors the commercial terms  for the first of what should be a number of new nuclear reactors in the UK. These are required to replace the older nuclear power stations built in the 1960s and 1970s which have provided base-load power for many years and have reached the end of their useful lives.

 The deal will be subject to agreement by the EU under state aid rules, but it should provide the basis to start construction early in 2014. This first station at Hinkley Point in Somerset will take ten years to complete and it will generate about 7% of UK electricity. Though the reactors and much of the equipment will come from abroad, there will be large number of construction jobs for the next  decade in the UK. A follow-on project at Sizewell in Suffolk will probably be approved two or three years later. Also, the deal will encourage Hitachi with it Horizon nuclear power subsidiary in the UK to step up efforts to establish their ABWR in  the UK.

 The wholesale strike price of £92.50 under the Government new and as yet unapproved Energy Market Reform Bill, is much higher than current market values. The price is competitive with other low-carbon sources of electricity such as wind and solar. If one thinks, as the Government does, that gas prices will rise this strike price will turn out be to be good bet. If world gas prices have peaked and they either fall, or continue at the current level, there will be pressure on the Government to  explain what will be seen in the future as a subsidy for nuclear.

 Because of the timescale of  nuclear projects  the EDF Energy decision will have no effect on  the looming energy squeeze in the next few years in the UK. As large volumes of coal –fired power stations are forced off the grid in the next 2 years by the EU sulphur emissions limits, capacity margins will be cut to 2-4%. Uncertainty about wholesale power prices has also led to the closure or mothballing of gas powered generation making the situation worse. As the only new generating plants that can be built in time are gas generators, the continuing energy policy  uncertainty is making the energy shortage worse, and ensuring that some  sort of energy rationing will be required in the next  few years.