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Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Costs Continue To Rise For Hinkley Point Nuclear Megaproject

  • The cost estimation for Great Britain’s Hinkley point C nuclear power plant has effectively doubled from 2016 to 2023.
  • Hinkley Point is really a colossal miscalculation of risk management.
  • The Hinkley point C project shows that the single asset concentration risk is too high for the utility company in question.

For close to a decade, Great Britain’s Hinkley Point C nuclear power project has served as the go-to punching bag for anti-nuclear activists. Sure enough, the gift that keeps giving has furnished still another reason to be chary of big nuclear projects.

Background for those not in the know. The current Hinkley Point nuclear project was the brainchild of British energy planners in the early 2000s. Their goal was to build another big nuclear plant at an existing site. Several actually. French state-controlled EDF took on the task with big British energy supplier Centrica as a minority owner. But Centrica soon backed out due to the escalating costs. EDF brought in a Chinese state company as a replacement partner. The UK government signed an agreement guaranteeing that the unit would collect a generous price for power generated (an insanely high price according to one critic at the time). In 2016, the project commenced with an estimated cost of £16-17 billion. Oilprice readers will not be surprised that these costs kept rising. In February 2023, EDF estimated that the final cost would be close to £33 billion ($40 billion), a 100% increase versus the initial estimated cost to completion. The Chinese partner may not agree to further investments beyond those initially agreed to so EDF could be exposed to even higher costs. With the completion date set for 2027, should we expect more increases? 

Related: U.S. Natural Gas Prices Have Plunged By Nearly 80% Since August

The news stories cite inflation as a primary reason for the cost increases. But the UK’s construction price index rose 40% between 2016 and 2023, while the estimated cost of the nuclear plant almost doubled. One distinguished economist noted that the plant would have cost far less if the government had financed it, but that is another matter. 

Hinkley Point is really a colossal miscalculation of risk management. Start with this statistic. The Hinkley Point project investment to date equals roughly one-fifth of the enterprise value of EDF. There are 56 other nuclear plants in EDF’s portfolio. One of the lessons learned by most US utilities after the Three Mile Island accident was that big nuclear plants and relatively small electric utilities are not a good match. In technical terms, the single asset concentration risk is too high. One might argue that EDF is big enough to take the chance, but that is clearly not so.  

Then there is the matter of whether the British government worked out its aims and the risks of the various solutions. Why did the UK need this nuclear project? To protect against the insecurity of foreign energy supplies? Wind turbines, solar and domestic natural gas would do that.  Or was it the main goal of policy makers to reduce greenhouse gas emissions? In this at least they may prove successful but there are much cheaper alternatives. Consider as an alternative weatherproofing all those damp and cold council houses which were designed to be drafty due to earlier pandemics and worries about gas safety. That would have saved a lot of energy and reduced the need for the project. Or was this another legacy project of the Tories’ whose main desire was to protect Britain from the labor militancy of  British coal miners whose last bitter, year long strike ended in 1985? From what we can tell, the UK government simply wanted a new nuclear power generating station period—more likely for national prestige—and not a discussion of alternatives, or the risks incurred by builders, or the financial consequences imposed on consumers by this decision.

This brings us to our final point. Hinkley Point C is a classic giant project, a category of construction brilliantly analyzed by British analysts in the 1980s. It is a huge effort that will take years to complete, requires a guess at market demand years from the date of inception, and once complete and in service will have a big impact on the market all at once when completed. In addition, this project involves many different owners and contractors, domestic and international, plus multiple national governments and requires the owner/builder to finance a project whose failure might have disastrous financial consequences for it. In other words, the project entails taking not only many risks but big ones. So why didn’t they consider alternatives first before plunging in?

The latest Hinkley Point nuclear cost re-estimate just underlines the need to find alternatives to large gigawatt-scale nuclear stations. They all have similar characteristics to Hinkley Point C. And consider that EDF is one of the most experienced nuclear companies, operators, and builder, so the problem does not lie with them alone. Relatively unique, giant construction projects are almost always difficult to complete on time and within budget. (This is even true for big hydroelectric projects.) That’s the main message. And one more reason to consider small modular reactors as well as exhibit proper skepticism when making cost comparisons. Cost estimates don’t seem too reliable there either.  But with a small plant, the errors should be manageable relative to the size of the builder or to the market,

Years ago, a legendary power engineer explained that large-scale electric power generating plants are always the right choice for utilities as long as one can accurately predict their costs, duration of construction, and condition of the market at the time of completion. Unfortunately, there is always an energy expert or government official who thinks this time is different and learns the hard way—as Hinkley Point C’s seemingly never-ending saga demonstrates.

By Leonard Hyman and William Tilles for Oilprice.com

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Leave a comment
  • Peter Farley on February 22 2023 said:
    It would be interesting to actually work out the cost/benefit of insulating the draughty houses. At say £20,000/house for insulation/heatpump. Thus for £30bn 1.5m houses reducing energy use by 2/3rds would save about 22 TWh/y almost the same amount of energy as this project will generate.

    But "negawatts" will have the benefit of zero operating costs and quicker delivery. If the UK had started the program in 2012 with 50,000 houses building up to 150,000/y over ten years they would have saved four years of the output of Hinckley Point before it opens and then save £550m/y in operating costs of the nuclear plant and transmission and distribution grid for the next fifty years
  • George Doolittle on February 22 2023 said:
    *"Meanwhile in Finland"* sad but true. $40 billion euros being about ten cents now so not sure what that has to do with anything.

    Kemper Energy carbon sequestration was fully functional here in the USA *AND PAID FOR* so go figure how that disaster that wasn't be the *TEXTBOOK CASE* for killing what was *ALREADY WORKING* now here we are sitting on the warmest February ever recorded in Modern History along the Eastern Seaboard so maybe someone should revisit that project...say like Exxon Mobil which claims to be a well run domestic producer looking out for shareholders interests rather than getting all bound up in Kazahkstan now apparently.

    Long Jack Dorsey strong buy

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