Public finance watchdog the National Audit Office has criticised the Department for Business, Energy and Industrial Strategy’s handling of the deal to construct new nuclear power station Hinkley Point C.
It said the new ministry and its Whitehall predecessor had not properly explored alternatives to the funding model created for the new Somerset plant that could have reduced overall project cost and taxpayers’ exposure to risk.
Driven by the now-scrapped coalition government policy of no public subsidy for new nuclear power stations, Hinkley C is being commissioned from the New Nuclear Build Generation Company on the basis of an agreed “strike price” for the electricity it produces, with the private sector being responsible for construction costs.
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That deal guarantees £92.50 – at 2012 prices – for each megawatt hour of electricity the plant produces for its first 35 years of operation, with the price rising annually by inflation.
The NAO said the strike price was £100.38 at 2017 rates, while the average price of electricity in the UK wholesale market has remained roughly £45 per megawatt hour since 2010.
While the deal protects UK consumers from cost overruns with the construction of Hinkley Point C, which is estimated to cost £18bn in 2016 prices, the NAO said the scheme would have to “overrun by between 400% to 600% to equate to the total cost of the deal”.
NAO head Sir Amyas Morse said it would take decades for clarity to emerge on whether Hinkley Point C would provide value for money.
“The department has committed electricity consumers and taxpayers to a high cost and risky deal in a changing energy marketplace,” he said.
“Time will tell whether the deal represents value for money, but we cannot say the department has maximised the chances that it will be.”
The NAO report stressed that past experience indicated that the government may still need to step in to help Hinkley Point C if it ran into trouble, either by funding alternatives to ensure secure supply of power or renegotiating the deal.
But it acknowledged that taking a greater stake in the delivery of the project could have obliged the government to account for the project as a public asset, bringing it onto the government's balance sheet – prompting trade-offs with other spending priorities.
“The government’s case for the project has weakened since it agreed key commercial terms on the deal in 2013,” it said.
“Delays have pushed back the nuclear power plant’s construction, and the expected cost of top-up payments under Hinkley Point C’s contract for difference has increased from £6bn to £30bn.
“But the department’s capacity to take alternative approaches to the deal were limited after it had agreed terms.”
The NAO said that BEIS and predecessor the Department of Energy and Climate Change had been in possession of value-for-money tests showing the economic case for Hinkley Point C was “marginal and subject to uncertainty”, while less favourable – but reasonable – assumptions would have meant the deal failed the tests.
It added that the department had also only considered the deal's impact on bills up to 2030, which did not take account of the fact that consumers would be locked into paying for Hinkley Point C long afterwards, and had failed to state whether top-up payments provided for in the deal were affordable.
The NAO also raised questions about the government’s decision to negotiate bilaterally with NNB Generation Company parent body Électricité de France for the construction of Hinkley C when it became clear that the firm was the only developer ready to take forward the project.
“Experience with renewables since 2014 shows that significantly lower strike prices can be achieved when contracts are auctioned competitively,” it said.
“The department viewed reaching a deal for HPC as a means of establishing earlier new nuclear capacity, including subsequent projects.
“It wanted to mitigate the risk that the UK misses its decarbonisation target if other low-carbon technologies are not available.”
Responding to the report, a spokesman for BEIS said: “Hinkley Point C will be the first new nuclear plant in a generation. This was an important strategic decision to ensure that nuclear is part of a diverse energy mix.
“Consumers won’t pay a penny until Hinkley is built; it will provide clean, reliable electricity powering homes and creating more than 26,000 jobs and apprenticeships in the process.”