Thursday, 9 October 2014

Hinkley Point passed! Woe for Capitalism

Oh dear, for once we want the EU to intervene on state aid grounds and it decides not too. I guess the greenie influence is too strong and in a very warped way they don't want to scare the horses re UKIP and a UK referendum.

The counter-factual to this decision to underwrite via a derivative contract the cost of energy of 35 year is this:

The price of oil is collapsing as is the price of gas. The derivative contract would mean in this situation that the UK taxpayer becomes more and more 'out of the money.' When this happened in 2008, the banks that had written these contracts and the firms that had placed them all went bust. The biggie here still being worked out was derivatives that were supposed to protect against rising interest rates, when rates went down instead, the purchasers were left with huge losses that Banks foreclose on.

In this case, we get a nuclear power station that is sucking money direct from UK taxpayers to French owned EDF - and the more the price of oil decreases, the larger the amount will wend its way across the channel.


Anonymous said...

Hopefully it's not too late for the interventin of Swampy types to prevent it. I would have thought the world had learned the perils of nuclear by now.

Budgie said...

Whilst I welcome a new nuclear power station for strategic reasons (we need a mix of electricity generation), this EDF bung is a dreadful outcome. However, it is mostly our own fault: nuclear is so expensive primarily because of legislation and regulation.

And to anticipate the uninformed view that regulation makes nuclear safer, it is engineering that does that. In my experience the regulations become more important than the engineering (yes, the customer said this to my face in a defence related project) naturally resulting in a poorer, higher cost and less safe outcome - indifferent and costly engineering gets baked in.

rwendland said...

Interesting the EU press release says "construction costs are estimated at GBP 24.5 billion (around €31.2 billion)", compared the the UK govt saying last year "government estimates [Hinkley C] will cost £16bn to build" - a 53% increase in cost estimates over a year. If this is a real increase in cost estimates, rather than a presentation issue, I wonder if EDF might get cold feet on this one as the profit forecasts must have taken a big hit.

CityUnslicker said...

rwendland - fabulous spot. We can but pray!

rwendland said...

CU, thanks for the complement, but I have to own up that the Guardian spotted this last night. The FT later offered an explanation:

"The lower figure was in 2012 prices and excluded interest payments made during construction and other pre-building costs, said EDF."

Another possibility is an accounting manipulation. The EU has forced a profit-share on the deal, whereby if there is excessive operational profits "the public entity will obtain more than half of the gains ... by a decrease in the price paid by the public entity to the operator (the so-called "strike price")." So increasing the build cost by an accountancy manoeuvre would make it much less likely that there will be excessive operational profits, so less likely this profit-share clause comes into play forcing EDF to reduce prices. As EDF is also building the plants, it can take more "costs" (profits for itself) during the build phase instead. So as well as reducing EDF's risks of having to profit share, this could allow it to book more profits during the build phase rather than have them come in during the 60 year lifetime, which makes the books look better in the short term and maybe adds management bonus as well. I've no idea if this is actually the case, but it sounds all so plausible to me.

measured said...

The oil price is being held at an artificially low. Some say it is the West's reward for using its military. Who knows? Boy, is it complicated. Putin plays poker while the Middle East plays chess. There is a price to be paid for escaping despot suppliers and EDF has found itself in the right place at the right time.

The EU is delighted to have found someone in the EU willing to pay for a new one of these.

Wildgoose said...

We need new nukes in order to shore up our base load electricity generation and ultimately to lessen our dependence on Middle Eastern Oil - part of the profits of which are recycled into building new Wahabi/Salafist Mosques and encouraging the radicalisation of Muslim youth both here and throughout Europe.

My preference though would be to invest in Molten Salt Thorium Reactors rather than this (as you rightly point out) dreadful deal for UK taxpayers.