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
Sport
football This was Kane’s night, even if he played just a small part of it
Travel
travel Dreamland Margate, Britain’s oldest amusement park, is set to reopen
News
news
News
Founders James Brown and Tim Southwell with a mock-up of the first ever ‘Loaded’ magazine in 1994
media
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
2015 General Election
May2015

Poll of Polls

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

Ashdown Group: Practice Accountant - Bournemouth - £38,000

£32000 - £38000 per annum: Ashdown Group: A successful accountancy practice in...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + Uncapped commission: SThree: Does earning a 6 figu...

Recruitment Genius: SEO Executive

£18000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: New Lift Sales Executive - Lift and Elevators

£35000 - £40000 per annum: Recruitment Genius: A challenging opportunity for a...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss