Weekly News Review - 27th February 2023
EDF warns cost of Hinkley Point C could soar to £33bn
French energy giant EDF has warned that the cost of the Hinkley Point C nuclear power station could rise by more than 20% due to high inflation. The estimated cost has now risen from the previous forecast of £26bn to £33bn. This follows further delays and budget increases at another EDF nuclear project in France.
When EDF first started work on Hinkley Point C in 2016, the estimated cost was £18bn with a project completion date of 2025. However, the rise in inflation has pushed up the price of raw materials and labour causing the total project cost to have nearly doubled. A series of delays, which have been worsened by the pandemic, have pushed the estimated completion date back to 2027 and have added to financing costs.
The project was originally a joint venture between EDF and state-owned Chinese General Nuclear (CGN) who agreed to finance 33.5%. However, relations with China have since deteriorated leading to the UK government agreeing to pay £100m last year to end CGNs involvement in the planned nuclear power station at Sizewell C.
EDF warned investors they would be asked to make voluntary additional equity payments in the second half of 2023 under a compensation mechanism for cost overruns. EDF said: “The project’s total financing needs exceed the contractual commitment of the shareholders.” However, it added that the “probability that CGN will not fund the project after it has reached its committed equity cap is high”.
Hinkley Point C will be the first new nuclear power station built in the UK in 30 years and is needed to replace the current aging fleet. When construction began in 2016 nuclear capacity in the UK was 8.9GW, however this will have fallen to 3.6GW by the time the project is completed. This is significantly lower than the 12GW of nuclear capacity the country had when Sizewell B opened in 1995.
The cost increase at Hinkley Point C follows the news that the Flamanville nuclear power station, currently under construction in France, is facing further delays. The EDF owned project has already been delayed by over a decade and is now expected to start operations in 2024. The European Pressurised Reactor (EPR) technology is the same as that being installed at Hinkley Point C.
T-4 Capacity Market auction clears at record high price
The provisional results of the T-4 Capacity Auction for delivery in 2026/27 were announced this week with 43GW of capacity procured at a record strike price of £63/kW. This is more than double last year’s T-4 strike price of £30.59/kW and follows last week’s T-1 2023/24 auction strike price of £60/kW.
The Capacity Market was introduced in 2014 as part of the government’s Electricity Market Reform package. It was designed to ensure security of electricity supply by providing a payment for reliable sources of capacity, alongside their electricity revenues, to ensure they deliver energy when needed. This is intended to encourage the investment needed to replace older power stations and provide backup for more intermittent and inflexible low carbon generation sources.
However, of the 43GW of capacity to be awarded contracts, 29GW is gas which represents around two thirds of the total auction capacity. The majority of the gas capacity is existing Combined Cycle Gas Turbines (CCGT) although contracts were awarded to 2.1GW of new build gas which includes the planned 1.5GW CCGT plant at Eggborough.
The auction also awarded contracts to just under 7GW of interconnector capacity, 3GW of storage and 1GW of nuclear. There was a continued increase in the volume of successful battery storage which has increased from 0.25GW to 1.3GW in the past two years. Renewable capacity also increased by eight times although still remains relatively low with 77MW of wind and solar capacity winning contracts.
The final results for the T-1 Capacity Auction for delivery in 2023/24 were also announced this week which saw a record 5.78GW of capacity awarded contracts. This is a 16% increase from the previous T-1 auction capacity of 5GW. However, the strike price has fallen from last year’s record high of £75/kW to £60/kW. The T-1 auction awarded capacity to 2.6GW of gas, 1.4GW of nuclear, 621MW of battery storage and 413MW of coal.
EU carbon price tops €100 a tonne for first time
The EU carbon price reached €100 a tonne for the first time this week, boosting the case for investment in green technologies. The EU Emissions Trading Scheme (EU ETS) price averaged €100.15/tCO2e on Tuesday beating the previous high of €98.01/tCO2e set in August 2022.
The EU ETS is a key part of the European Union’s policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively. It was the world’s first major carbon market when it was set up in 2005 and remains the biggest one. The EU has pledged to cut its emissions by 55% by 2030 versus 1990 levels.
The EU ETS works on the ‘cap and trade’ principle. A cap is set on the total amount of certain greenhouse gases that can be emitted by the companies covered by the system. The cap is reduced over time so that total emissions fall. Within the cap, companies buy or receive emissions allowances, which they can trade with one another as needed. The limit on the total number of allowances available ensures that they have a value.
The EU ETS price remained relatively low for the first decade of the scheme but has increased significantly in the past few years. At the start of 2018 the carbon price was as low as €8/tCO2e but increased throughout the year and spent most of 2019 and 2020 in the €20-€30 range. However, carbon prices have continued to rise since the start of 2021 and have now reached the landmark figure of €100/tCO2e.
It is expected that the €100 threshold would incentivise investments in emerging clean technologies such as carbon capture and hydrogen, however energy intensive industries have warned of the impact that higher carbon prices might have on their businesses and on their ability to make investments.
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