Hinkley nuclear power station could push energy bills up by 3%

Artists impression issued by EDF of the how the new Hinkley Point C station will look. Credit: PA Wire

The government decided back in 2007 Britain needed a new fleet of nuclear power stations.

Its objective was threefold: to ensure energy remains as affordable as possible; as low-carbon as possible and, with Britain's North Sea oil and gas reserves in decline, that we have a reliable and secure future supply of power.

The time was when the state wanted a nuclear power station built it would go ahead and build it, but our government wants private companies to finance the construction; shifting the bill away from the taxpayer and in the direction of the consumer (yes, we are both. More in a moment).

This morning the European Commission decided that some form of state aid is not only appropriate to enable private companies to deliver these extremely expensive projects, it's essential.

Joaquin Almunia, Vice-President of the European Commission, admits to "initial doubts" but is clearly now persuaded that some form of taxpayer support (some would say subsidy) is necessary.

The scale of the Hinkley Point project is enormous. On completion the plan is that the single site in Somerset will generate 7% of the electricity that the UK needs.

The cost of delivery will be £24.5 billion. EDF doesn't have this kind of money lying around, much of it will be borrowed (£17 billion), EDF will also need to have contingency funds it can draw on of around £9 billion. The EU has concluded this is money that EDF will not be able to raise without help, in the form of loan guarantees, from the British taxpayer.

As an additional incentive to build a year ago the government agreed that EDF would be allowed a guaranteed return of £92.50 (what's often referred to as the "strike price") for every megawatt hour of electricity Hinkley C eventually generates.

This is almost twice the current market price of electricity but provides the reassurance to EDF that it will make a profit on the considerable sums it invests.

Last night, at a conference designed to encourage better engagement between politicians, energy companies and the public, the chief executive of SSE, Alistair Phillips-Davies, said this deal with EDF "is an expensive way to get nuclear power stations built".

He told me afterwards that when Hinkley Point is finally hooked up to the grid in 2023 the price of the average bill will go up by around 3%. This is not an SSE figure but is, I'm told, widely accepted within the industry.

The EC is clearly of the view that the government was too generous in the deal it struck with EDF.

The chief executive of SSE, Alistair Phillips-Davies. Credit: SSE

It has hiked the fee that EDF will pay the government to guarantee the loans it takes out by £1 billion. The EC has also built in a mechanism by which, if Hinkley proves the cash cow that some in the industry believe it will be, the consumer gets a greater share of the spoils.

Simply put, if Hinkley generates returns above those EDF has agreed with the government then the strike price will fall more significantly to reflect this. This profit sharing arrangement will last for 60 years, rather than the 35 that had been negotiated.

The deal will make Hinkley C potentially less profitable but EDF's enthusiasm seems undiminished.

Vincent de Rivaz pictured with David Cameron at the future Hinkley C nuclear power station. Credit: PA Wire

The company describes today as an "important milestone" and has indicated that it is likely to make what it calls the "final investment decision" in the next few months.

EDF has had plans to develop the site at Hinkley since 2007.

Vincent de Rivaz, the EDF Energy CEO, once said he hoped to be able to be able to roast his Christmas turkey with power from Hinkley C by 2017. Deadlines have since slipped, the process has taken longer than imagined but the project is shovel ready and the taxpayer support has been formally approved.

Investors still need to be wooed, legal documents signed but, all being well, Mr de Rivaz should be cooking with Hinkley C electricty by 2023.

Six years late.