Government ‘may not have got best value for money on Hinkley Point project’

22 Nov 17

The government did not sufficiently appraise alternative ways to finance the Hinkley power plant deal that might have offered better value for money, a Public Accounts Committee report has found.

MPs have criticised The Department for Business, Energy & Industrial Strategy and the Treasury for failing to evaluate all the possible financing structures for the Hinkley Point C project.

This will leave consumers paying for expensive energy, the committee concluded.

Today’s report said: “Neither the department [BEIS] nor HM Treasury demonstrated to decision makers the benefits and costs of alternative ways of financing the deal that might have resulted in better value for money.”

The government is locked into a 35-year deal with the French state-owned EDF energy company, which leaves consumers facing a five-fold increase in energy costs, set in 2013 at £92.50 per megawatt hour, when the plant opens.

The report stated that the scheme’s construction is expensive because the government wanted the private sector, in this case NNB Generation Company Limited (NNGB) a subsidiary of EDF, to bear all the production risks.

This enabled the government to keep costs off its budget sheet and eliminate risk of taxpayers incurring costs if there were delays as it was privately financed. But the committee said sharing the early project risks between the government and NNBG could have “significantly” reduced total project costs.

The watchdog argued this may have allowed the government to renegotiate the prices agreed for the plant’s energy production which have now grown in cost.

The department forecasts that consumers will now pay £30bn in top-up payments over the contract’s 35 years, five-times more than the £6bn it had expected in 2013.

Earlier this month the Institute for Government said ministers had to improve the way government finances large-scale infrastructure projects to ensure greater value for money and named Hinkley among its “expensive, inflexible contracts”.

MPs highlighted that the strategic case for nuclear power was last considered in 2008 but since then the economic case for Hinkley deteriorated as construction costs rose, alternative low-carbon technologies became cheaper and fossil-fuel price projections fell.

Today’s report stated: “The department did not attempt to renegotiate the deal in light of the weakening case because it assumed the project’s investors would not have accepted a lower return on the project and that the deal would have collapsed or been delayed.”

However, MPs said given that both developers, EDF and CGN, are state-owned companies, that may well have accepted lower returns than the 9% built into the Hinkley Point C deal. They said the department should have done more to explore whether this assumption was correct.  

Meg Hillier, PAC chair, said the government had made “grave strategic errors” as the committee urged the government to show decision makers the cost and risk implications of different possible financing structures when appraising large infrastructure projects in the future.

She added: “Bill-payers have been dealt a bad hand by the government in its approach to this project.

“Its blinkered determination to agree the Hinkley deal, regardless of changing circumstances, means that for years to come energy consumers will face costs running to many times the original estimate.”

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