Why worry about a bad deal when the abusive government can extract taxes from it populace
EDF would have settled at a lower price, with lower guarantees But, didn't have to.
The details of the deal to build Britain’s new nuclear reactors at Hinkley Point are becoming clearer: a basic cost of £16bn, a quiet increase of £2bn since the last parliamentary statement on the issue less than six months ago. It guarantees a unit price of £92.50 per megawatt hour for the electricity produced, stretching four decades into the future, and the UK government in effect underwrites the investment.
The argument for doing this deal is that there was no alternative. Shale gas has not yet been proved. The commitment to reduce carbon emissions is legally binding and can be changed only by new legislation, which would not get through the House of Commons. Offshore wind is even more expensive. Coal is dirty, and supplies of conventional gas would have to be imported and are vulnerable to price volatility. Energy prices will always rise so if we can lock in some supplies for the long-term, even if it means paying double the current wholesale price, it must be beneficial. Those are the arguments. The reality, however, is that there are alternatives. The fact that they were ignored is what makes this such a poor deal.Shale gas hasn't been approved but there is a commitment to reduce carbon emissions?
Cognitive dissonance? Contradiction?
First, there are extensive supplies of gas available in what is becoming a buyers’ market. The link between gas and oil prices is being broken and the trade in liquefied natural gas is creating more gas competition, particularly in Europe. The UK could have signed some long-term supply deals on very advantageous terms.
To reinforce security of supply, the government could have established some sensible arrangements for back-up storage.The UK could have signed long term deals for liquified natural gas at very, very attractive prices. But,they didn't! Because this is graft. Cronyism.
Second, there could have been a focus on energy efficiency. Using less energy is by far the best way to reduce both emissions and the size of energy bills. If the UK matched Japan in terms of energy use per unit of gross domestic product, consumption would be some 20 per cent lower. Instead the Green Deal, which was intended to encourage energy conservation at the household level, has been an expensive fiasco.
The fact is that energy prices are not doomed to rise forever. In the US, because of the shale gas revolution, prices have fallen over the past decade and that is beginning to be transmitted to the international market. Britain is locking in high prices just when the underlying trends suggest a structural fall. That will further undermine the competitiveness of companies that use significant amounts of energy.
There is a case for some new nuclear as part of a balanced energy mix in the UK, but not at any price. That brings us to the most disappointing aspect of the Hinkley Point announcement – the failure to get a better deal for consumers.
The government began the negotiations with a red line determination not to pay more than £80/MWh. Some thought even that was expensive. The government has now comprehensively rolled over. One option ignored was to make the deal subject to tender, as is normal in public sector contracting. EDF – which will build on the site in Somerset – is not the only supplier of nuclear stations in the world and the French reactor is not the only design. A competitive process would have forced companies to focus on bringing down costs and written an appropriate package of incentives into the deal. No one should begrudge EDF a fair rate of return on a huge, long-term investment. But rates of return should not be guaranteed. They should depend on performance with an incentive to keep costs down.Wow, the British government did good by the British people with this deal!
A misunderstanding of the deal’s importance to EDF and the French nuclear sector was behind this. After the failure to manage development of France’s latest nuclear station at Flamanville, which is billions of euros over budget and years behind schedule, the Paris-based group badly needed the endorsement of a new international contract. Hinkley Point opens the door for EDF to more developments around the world. It needed the deal even more than the UK did and would have settled at a lower price, with lower guarantees.
Deals that are built on a one-sided victory tend not to last. Good business is done on the foundation of mutual advantage. The deal is now done, but in an environment where consumers are paying more attention to what they are paying, and when serious alternatives are available, this story is far from finished.