* Explanation of awful bilingual pun at end
While my American readers settle down on Tuesday night to enjoy the end of the political ambitions of Ken Cuccinelli at the hands of a Democratic party hack with zero experience in government, I’m settling in for a long comedy serial: Sir Humphrey Appleby vs. European Commission in re Hinkley Point C.
The dying nuclear industry (my take on the economics, politics, mascot) has just scored an extraordinary win in Britain. The government will commission EDF and its Chinese partners to build the £16bn, 3.3Gw, two-reactor Hinkley C plant. It’s a fixed-price contract: but to get this protection from the high construction risks, it has had to guarantee an FIT of £92.50 ($147.9, €109.3) per megawatt-hour for no less than 35 years from the supposed completion date of 2023, indexed for inflation. And EDF will be compensated for any curtailment from wind and solar.
The FIT is double the current British wholesale price, twice the current onshore wind FIT, and considerably higher than current German non-indexed FITs for on-and offshore wind and solar. The price of both wind and solar is bound to fall; the British government accepts this, but it lowballs the trend rates. It thinks the price of solar will only decline by 3% a year, far lower than experience and typical industry forecasts.
Whatever were they thinking of? I thought this was bizarre, but nevertheless a done deal. Not in fact.
British policy will be giving a state-aided competitive advantage to nuclear power in this cross border trade over and above renewable energy. This threatens to directly contradict EU competition and internal market policy and law.
This issue will be a prominent factor in the European Commission’s investigations in the UK Government’s application for state aid for Hinkley C (for which it has recently notified the Commission). Renewable generators across the EU will be pointing out how the UK policy may be contravening EU law. Analysts will remember that it took a case at the European Court of Justice (ECJ) to establish the right of the German state to give premium prices to renewable energy. What would the ECJ say about a case where nuclear power was being given priority premiums in the EU electricity market against renewable energy? I can see no basis in law for this ……
The British Government has its plans that the Hinkley C state aid consent will be given by the Commission in a year’s time. Well, nuclear interests may control the British Government so that they can plan how they like, but they do not have quite the same leverage at the EU level. The EU Commission has already rejected an attempt by the UK Government to get EU state aid rules changed to allow state aid for nuclear to be included on the same basis as renewables. …..
The British grid is not isolated. There are 3GW of undersea interconnectors to France and the Netherlands, and 850 MW to Ireland (North and Republic). There are plans for another 500MW to Ireland and 1 GW to Belgium: together more than Hinkley. The complaints of German and Irish generators at being shut out of the British market will have substance.
Toke notes that the Commission has no reason to be nice to David Cameron. That matters less than two other factors.
One is cultural. Britain has, from the beginning, disliked the supranational vision of Jean Monnet. It has tried, with some success, to bend the European Union back into an intergovernmental mode. Cooperation on crime and justice, a recent addition, is largely intergovernmental. At heart, Cameron thinks of the EU in Westphalian terms, as a roomful of kings. If he can get Hollande and Merkel to agree to something, and talk round the lesser princes, the deal is done. But in parts of the EU institutions, the old supranational vision still burns: and this includes the Directorate-General for Competition and the European Court of Justice. For them, the EU is the government-in-waiting of Europe, and in the areas where it has “competence”, already is. They are not joking when they say that European law overrides national law, though the German Constitutional Court in Karlsruhe insists it does not trump the German Constitution.
The competition officials are, and Microsoft can show you the scars, among the few real hardline trust-busters left anywhere. They inherited their culture from the German Cartel Office. Its effectiveness can be traced partly to Erhard’s free-market beliefs, partly to the association of prewar cartels with reactionary politics and support of the Nazis.
The other is German politics. The German generating utilities are suffering badly from the impact of renewables and especially solar, which is taking away their profitable daytime load. The German wholesale electricity market price went negative on June 16th. Exports are a vital lifeline. They will certainly be knocking on doors both in Berlin and Brussels. Their objections to the Hinkley deal will have political as well as legal weight. Angela Merkel took a radical decision in 2011 to phase out nuclear power in Germany on an accelerated timetable, incurring considerable costs. She will have no sympathy with Cameron’s self-imposed problem.
Act II then is likely to be a Commission ruling that the Hinkley state aid is illegal (9 months?). Britain can appeal this to ECJ (6 months?) and probably lose. The ECJ only approved German renewable FITs reluctantly, and they represented a coherent policy.
At that point (Act III) the conflict gets folded into Cameron’s “renegotiation” of British membership. He won’t get more than symbolic concessions, on tabloid-bait like this. Cameron has promised to take the results to the British electorate in a yes/no referendum on continued membership, after the next election. If Labour wins this (they ought to), there won’t be a referendum.
EDF won’t start building Hinkley until the EU issue is settled, which takes us past the next British election in May 2015.
So Act IV is the election. Hinkley will be a pretty manifesto problem for Labour. Do they promise to cancel? For the Tories, Hinkley will also be a problematic exhibit. “The evil Brussels bureaucrats are stopping Her Majesty’s Government from wasting billions of your money for the next 50 years on obsolete technology”: lacks that little something. Alternatively Cameron can just blame the whole fiasco on the Lib Dems, who have provided the current and previous Energy Secretaries. They aren’t ready for prime time politics, and never will be.
The easiest way out for all concerned will be for EDF to discover new cost issues with the project, so they make a demand to renegotiate, which can be turned down without loss of face (or election).
Paddy Power (online bookmakers) should open a book on this.
Note 1. TINA! This does not wash. Half the countries in the world, including Germany, face the prospect of the energy transition without nuclear. Indeed, Britain has to get through the next 10 (more likely 17) years without Hinkley anyway. You can build lots of wind. Britain has unusually good resources, provided Chelsea Marie Antoinettes can overcome their vapours at the prospect of a working landscape. You can cover every roof with solar; build more interconnectors including to Norway to tap its hydro and even Iceland for geothermal; double pumped storage capacity (none has been added since 1984); research grid batteries and EGS geothermal ready for rollout if needed.
Note 2. Hinkley C has done a notable disservice to the industry, and a service to taxpayers everywhere, by providing a thoroughly considered and up-to-date new benchmark for the real cost of new nuclear capacity. It’s astronomical. Anybody who cites a lower price is saying that the world’s most experienced and successful nuclear operator, EDF, has got its sums wrong. But thorium reactors …. but mass-produced small reactors …. but breeders …. but sparkly ponies. Wall Street lost interest a decade ago.
Note 3. But China! There’s half a point. China is indeed building reactors, 28 of them, which when completed will take its nuclear capacity from 14 Gw to 42Gw. The government has leaked the intention to cut the official 2020 target from 80 Gw operational to 60-70 Gw. More significant is the fact that no new reactor has been ordered since December 2012, and only two since Fukushima. Source for all this: World Nuclear Report 2013, pp 94 ff. Even 60 Gw for 2020 looks out of reach now. China now has the deep pool of reactor-building experience everybody else has lost, but the news from the construction sites and design bureaus and safety inspectors cannot be all good.
Meanwhile China’s targets for wind and solar are raised and raised again. Currently the 2020 ones are 50GW for solar and 200 Gw for wind, comfortably outstripping nuclear in effective capacity. The 2015 solar target was recently raised to 35 Gw, implying 10Gw installation a year, so it would be logical to raise the 2020 one at least in line (>85 Gw).
This is not a difficult choice. Suppose you are one of the seven members of the Chinese Politburo Standing Committee, facing a national air pollution crisis from coal burning. You need serious improvements in under five years or face mass protests. Can a nuclear crash programme help? No.
* Kern is German for core, kernel; also nucleus. Kernkraftwerk = nuclear reactor.