Britain signs deal with EDF for new reactors: Nuclear power deal ‘is vital to keeping the lights on’, says Ed Davey

Government agrees to guarantee the French utility EDF about twice current market rate for electricity produced at new Hinkley Point reactors

Environment Editor

The Energy Secretary Ed Davey insisted that new nuclear power is essential to keep Britain's lights on as he unveiled a long-awaited agreement to build two more reactors at Hinkley Point - at a cost of £2bn more than previously announced.

After months of wrangling, the government has agreed to guarantee the French utility EDF about twice the current market rate for the electricity produced at Hinkley Point C in Somerset.

Known as the "strike price", Edf and its Chinese partners will receive £92.50 per megawatt hour (M/wh) for its electricity for thirty-five years after production begins in 2023 - whatever the prevailing market price.

This price will give Edf a return of about 10 per cent on its investment, which was the price the French utility demanded in return for the risk associated with such a large and uncertain project.

In the face of criticism that he was paying too much, ensuring further hikes in energy bills that are already squeezing household finances, Mr Davey insisted that he had struck a good deal and one that was essential to safeguard Britain's power supply.

"If people at home want to be able to keep watching the television, be able to turn the kettle on and benefit from electricity, we have got to make these investments. It is essential to keep the lights on and to power British business," Mr Davey said.

He said it would create 25,000 jobs, most of them British, and said up to 57 per cent of the value of the project would go to UK companies.

Mr Davey said that the strike price, of £92.50 per megawatt hour (Mwh) was competitive with other large scale forms of low-carbon energy production and would fall to £89.50/Mwh if EDF proceeds with a second plant, Sizewell C in Suffolk, to reflect the fact that costs will come down with each successive plant as economies of scale kick in.

The price of Offshore wind power is currently £155 Mwh, although it will fall to £135 by 2018 and is expected to continue falling afterwards. Onshore wind is £100 per Mwh, falling to £95 in 2018, with large solar farms at £125, due to falling to £110 by 2018.

While the nuclear strike price is lower than most other forms of low-carbon energy, experts cautioned that, unlike other technologies which are forecast to decline, the Hinkley Point price was frozen for 35 years - or rather linked to inflation.

"It's sensible to have some nuclear power for the sake of energy security and diversity of sources. But this is certainly not a cheap option," said Angus McCrone, of Bloomberg New Energy Finance.

Bloomberg calculates that the cost of gas-fired electricity generation is currently about £55 per Mwh at the moment and predicts that it will be about £74 in 2023 when the new Hinkley Point reactors are set to commence - although the group cautions that forecasting the gas price is difficult.

Concerns that the cost of the Hinkley Point project could continue to rise mounted yesterday as Edf increased its cost estimate of the project to £16bn, from its latest estimate of £14bn its £9bn forecast of December 2010. The company put the increase down to additional work at the site, including more foundation work and adapting the design of the reactor to meet UK regulatory standards.

The European Pressured Water Reactor (EPR) that will be used at Hinkley Point is being manufactured by France's Areva, which is also working on two similar projects with EDF - in France and Finland - which are running over time and budget.

The strike price allows Eef to claim the difference between the wholesale electricity price and the strike price, with the extra being added to consumers bills. Conversely, if the wholesale price rises above the strike price, Edf will have to refund the difference - although analysts believe this is unlikely.

Separately, the government has announced that energy, road and rail projects worth £33bn have passed the first hurdle in getting a government infrastructure guarantee. Forty projects are now at the so-called prequalification stage, meaning they are eligible for the UK Guarantee scheme. They include the Drax Power station, which received a £75m guarantee for the partial conversion of its coal-fired power station to biomass. Hinkley Point C is another example.

Strike prices: How energy is subsidised

The government has agreed to guarantee EDF £92.50 per megawatt hour of electricity – enough to power an average UK household for three months – that is produced at Hinkley Point C for 35 years from the start of production.

Production at the site is due to begin in 2023, meaning the current deal would run until 2058.

This price is known as the ‘strike price’ and is effectively a subsidy to incentivise the development of low-carbon technologies. The Hinkley Point strike price is just over double the current wholesale electricity price of about £45/Mwh which, in turn, makes up about 37 per cent of the average UK electricity bill – the rest is made up of distribution costs, green levies and other supplier costs.

The strike price varies according to the technology in use.

The following list illustrates how the Hinkley Point strike price compares to strike prices for other low-carbon energy sources;

Hinkley Point: £92.50
Onshore wind farms: £100
Offshore wind farms: £155
Biomass: £105
Large solar plants: £125
Hydro electric dams: £95
Anaerobic digestion: £145

Gas-fired power stations are not eligible for a subsidy, or strike price, because their technology is proven and they emit too much carbon.

However, Bloomberg calculates that the cost of producing one Mmh of electricity through a gas-fired power station is about £55, and estimates that this will rise to £74 by 2023 – considerably less than the £92.50 that Hinkley Point will get.

In contrast to the Hinkley Point strike price, which will be frozen for 35 years, the strike prices of the other low-carbon energy sources are current and at least some of them will come down over time.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: ICT Infrastructure Manager

£27000 - £30000 per annum: Recruitment Genius: This Edinburgh city centre scho...

Recruitment Genius: Massage Therapist / Sports Therapist / Physio / Osteopath

£12000 - £24000 per annum: Recruitment Genius: An opportunity has arisen for o...

Recruitment Genius: Account Manager / Sales Executive - Contract Hire

£35000 - £60000 per annum: Recruitment Genius: This industry leader provides c...

Recruitment Genius: Project Coordinator

£28000 - £30000 per annum: Recruitment Genius: A Project Coordinator is requir...

Day In a Page

John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

39.8 degrees recorded on Tube

There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

Computerised cooking is coming

From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

Jessie Cave's feminist cartoons

The Harry Potter star tells Alice Jones how a one-night stand changed her life
Football Beyond Borders: Even the most distruptive pupils score at homework club

Education: Football Beyond Borders

Add football to an after-school homework club, and even the naughtiest boys can score
10 best barbecue books

Fire up the barbie: 10 best barbecue books

We've got Bibles to get you grilling and smoking like a true south American pro
Wimbledon 2015: Nick Bollettieri - Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power

Nick Bollettieri's Wimbledon Files

Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power
Ron Dennis exclusive: ‘This is one of the best McLaren teams ever – we are going to do it’

‘This is one of the best McLaren teams ever – we are going to do it’

Ron Dennis shrugs off a poor start to the season in an exclusive interview, and says the glory days will come back
Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most