The Nucleus of Future High UK Electricity Prices Set in Concrete

In June, workers finished pouring the 9,000 cubic meters of concrete for the base for the UK’s 3,200 MW Hinkley C nuclear power station, set to come online in 2026.

Everything about this project is big: the £19.6 billion undertaking is the largest construction project in the country’s history, exceeding the cost of the Chunnel between England and France, gobbling up as much concrete as 75 sports stadiums, and utilising the world’s largest crane.[1]

And everything about this project is risky as well: its estimated costs have risen from £6.1 billion in October 2013 to £20.3bn by the end of 2017 (the latest official estimates). Given the history of other reactors of its type under construction in the west (Finland’s Olkiluoto and France’s Flamanville – both suffering lengthy delays and staggering cost overruns), there is non-zero risk with respect to both Hinkley’s final cost and delivery date.

However, one fact that is abundantly clear: part owner EDF (China General Nuclear Power Corporation is the other owner) has negotiated a guaranteed fixed price of £92.50/MWh (in 2012 prices),[2] a price that compares very poorly to the average spot market rates of £56 over the past year.

Pressure on future electricity rates

Given the fact that Hinkley C is slated to generate 7% of the country’s electric energy, rate increases appear all but certain. In fact, the government National Audit Office commented in its June 2017 report that electricity consumers and taxpayers are committed to “a high cost and risky deal in a changing energy marketplace.[3]” The report observed further that The Department for Business, Energy and Industrial Strategy’s “value-for-money tests showed the economic case for Hinkley Point C was marginal and subject to significant uncertainty. Less favourable, but reasonable, assumptions about future fossil fuel prices, renewables costs and follow on nuclear projects would have meant the deal was not value for money according to the Department’s tests.” In other words, they knew the plant was likely a financial loser sometime ago.

Worse still, in a world in which more efficient, superior and cost-effective sustainable technologies continue to flood global power markets, the UK energy consumer is locked into this deal for up to 60 years. The Audit Office noted that owing to delays, the cost of ‘top-up payments” under a contract for difference have ballooned from £6 billion to £30 billion.

Meanwhile, while the terms of Hinkley are set in concrete, the costs of other electricity supply alternatives - such as offshore wind - continue to fall. But that won’t help the country’s power consumers much, since a good chunk of their power costs are now fixed for multiple decades. This poses a problem for businesses seeking to manage costs and maintain their competitive postures, especially those exposed to electricity costs as a major input.

Look north for alternatives

Datacenters – being energy-intensive endeavors - fall squarely into that camp. In an earlier blog,[4] we commented that the uncertainty of Brexit should give datacenter owners and their clients pause for thought as to whether they should look outside the country for their compute options.

In this case, we focus on the near-certainty that Hinkley will exert a strong upward impact on electricity rates should incentivise those in the data-centric world to investigate other compute options (wherever latency is not a critical prerequisite). Once again, we suggest one’s gaze should be oriented northwards to the Nordic countries with their multiple positive attributes. Sweden, Norway, and Iceland all enjoy highly competitive rates, carbon-free electrons, robust power grids, and stable pricing environments. At a minimum, for those facing a rather challenging UK electricity future, the Nordic power markets are open for business to datacenters and merit at least a look.





Written by Peter Kelly-Detwiler (Guest)

See Peter Kelly-Detwiler (Guest)'s blog

Peter is co-founder of NorthBridge Energy Partners and has more than 25 years experience in the international energy industry. You can follow Peter at: @PKayDee

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