August 1, 2016 / 1:31 PM / 2 years ago

Costs and challenges to UK Hinkley Point nuclear project

(Reuters) - A British government decision last week to delay approval of French utility EDF’s (EDF.PA) plans to build two new nuclear reactors at Hinkley Point is the latest blow to the costly project.

The British government, which had been expected to sign contracts on Friday, postponed its verdict until early autumn.

British Prime Minister Theresa May was concerned about the security implications of a planned Chinese investment in the new plant and intervened personally to delay the project, a former colleague and a source said on Saturday.

The pouring of the first concrete at Hinkley Point C in Somerset is scheduled for mid-2019 but the plant’s start-up date has been delayed several times due to regulatory hurdles, the fallout from the Fukushima nuclear disaster in Japan and EDF’s deteriorating financial position.

While EDF is profitable, its heavy investments are weighing on cash flow and it has had to borrow billions of euros in recent years just to pay dividends, pushing net debt to over 37 billion euros, more than twice its market value.

Below outlines the costs and challenges involved in the project.

COSTS

EDF says it has spent 2.4 billion pounds ($3.17 billion) on the project so far. In total, the project will cost around 18 billion pounds to build. Including financing costs, this figure is expected to be around 24 billion pounds.

In October last year, EDF reached an agreement with China General Nuclear Power Corporation (CGN) whereby the Chinese firm took a stake of around a third in the Hinkley Point project and paid 6 billion pounds.

EDF said then it might sell another 15 percent stake in the project, but would maintain a majority holding.

EDF has announced cost cuts, asset sales, a 4-billion euro capital increase and two more years of scrip dividends to boost its finances.

On the UK side, the government has guaranteed 92.5 pounds per megawatt for the power the plant produces for 35 years under its contract-for-difference (CfD) subsidy scheme.

Due to a fall in wholesale electricity prices since the contract was agreed the top-up payments the government could need to pay under the CfD scheme have rocketed to 30 billion pounds from 6 billion when the deal was first agreed, according to Britain’s National Audit Office.

Britain has also offered to guarantee up to 2 billion pounds of bonds that NNB Generation Company, an EDF subsidiary, may issue to finance construction.

    WHO BEARS THE RISK?

    An investment contract between EDF and the UK government has been agreed in principle but not yet signed. The British government had been expected to sign contracts last Friday but it said it wanted to give the plans further consideration.

    EDF declined to comment on Monday on whether there are any clauses specifying damages in the case Britain withdraws.

    Under the investment contract agreed in principle between EDF and the UK government but not yet been signed, EDF and its partners take the risk of constructing the power plant and the project would be protected from unforeseen changes in law.

    A spokeswoman for the Department for Business, Energy & Industrial Strategy said on Monday the government is not responsible for any costs until a contract is signed.

    This April, the former energy and climate change secretary Amber Rudd said in a letter that when all the contracts are signed, all risk is borne by EDF, “except in the case of a narrow and extremely unlikely range of circumstances such as a political shut down or a change in law, which are almost entirely within the control of the UK government.”

    CHALLENGES

    Last year, Austria launched legal action against the European Commission after it backed Britain’s plan to guarantee the price of power for the Hinkley Point project, saying it went against the EU’s aim to support renewable energy.

    The British government has played down the legal threat. In June, former British energy minister Andrea Leadsom said the challenge did not have any merit.

    Separately, in April this year environmental campaign group Greenpeace and renewable energy supplier Ecotricity threatened legal action against the Hinkley Point project if the French government offered financial support.

    The previous month, French Economy Minister Emmanuel Macron said that France was willing to recapitalise EDF and possibly renounce a cash dividend to help the company.

    Added to that, the EDF works council has filed a new complaint with a Paris court about EDF’s final investment decision on Hinkley Point as they think the firm’s finances are too stretched.

    The hearing on the case is scheduled for Aug. 2.

    The works council had already filed a separate procedure to force EDF to release confidential documents about the project.

    French daily Le Monde also reported last month that France’s AMF stock market regulator was examining financial communications concerning the utility’s nuclear reactor renovation programme as well as its Hinkley Point project.

    ($1 = 0.7573 pounds)

    Reporting by Nina Chestney and Susanna Twidale in London and Geert de Clercq in Paris, editing by Louise Heavens

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