Energy and Environment

Hinkley Point C decision further undermines competition in the electricity market

The European Commission has given the green light to the construction of a new nuclear plant at Hinkley Point. This may or may not be part of a nuclear renaissance, but it is definitely a further weakening of the British model of liberalisation of the electricity market.

The Hinkley Point C scheme will be made possible by a number of state-backed financial guarantees. The most important one is the introduction of a ‘strike price’ of £92.50 /MWh, about twice as much as the current wholesale price of electricity. This arrangement will be kept in place for as long as 35 years, vis-á-vis an expected technical life of the plant of 60 years. According to the EU Commission’s estimates, the new plant will become operational in a time of 10 years for an investment cost of £34 billion. If the past can provide guidance, both costs and timetables are likely to overrun.

A brief analysis of the figures illustrates the economic shortcomings of the scheme. Under the assumption that electricity wholesale prices will stay around the current level for the next 35 years and that the extra-cost is justified by the alleged positive externalities deriving from more carbon-free energy, it follows that the external benefit is priced at £40-50/MWh. Under the further assumption that the additional nuclear power will displace electricity produced by Combined Cycle Gas Turbines at the margin, with average emissions of 340 kg CO2/MWh, it follows that British consumers will pay an average of £117-147 per ton of CO2. The same ton of CO2 is now priced on the EU Emissions Trading Scheme (a cap-and-trade mechanism designed to find the most cost-effective ways to reduce emissions) well below £8. This implies consumers will be forced to pay 14-18 times more for the same product (i.e. the positive externalities from carbon-free power). The fact that other green sources, such as wind or solar power, are subsidised just as much, or even more, does not make the impact any less painful.

There is, however, a cost that is even higher than the mere monetary cost of the British nuclear deal. By picking a preferred technology and determining an energy price that it (and not the market) believes is the right one, the British government is seriously compromising the functioning of electricity market. This adds to several anti-market decisions that have been taken over the past few years. By relying less and less on decentralised competition, and more and more on centralised policies, the UK is creating an environment plagued by high costs and high inefficiencies, such as the one that was radically changed by the Thatcher-Lawson revolution in energy policy.

There is more: not only is the ‘British model’ of free-market competition progressively being undermined, but also the credibility of the EU’s stance against discretionary state-aid. The recently adopted guidelines for state aid in the energy sector are entirely predicated upon the objective of making state aid less distortionary, by relying on a technology-neutral approach and market-based mechanisms to assign the subsidies. Indeed, as the British government announced its nuclear deal, the EU Commission came out with a tough stance on it. Now, the loose conditions introduced by Brussels are aimed at limiting the potential windfall profits, but say nothing on the mechanism design that led to the award of such prolonged, generous support to an arbitrarily favoured technology.

This decision not only pushes the UK further away from its once-successful model; it also creates the perception that the EU will in future take a relaxed approach to its own state-aid regulations.