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Will Hinkley C ever be built? If so, China will exact a very high price
22nd October 2015
China's nuclear investment into the UK raises more questions than it answers, writes Oliver Tickell. The £6bn committed is nowhere near enough to see Hinkley C to completion, and EDF has few options for raising the rest elsewhere. The only answer is more Chinese money, and it won't come cheap - not for Britain, nor indeed for France's vulnerable nuclear corporations.
With no other investor willing to finance the UK's desperate nuclear ambitions, China's motivations are not purely financial. It has perceived a vulnerability and has decided to exploit it for its own strategic, industrial and geopolitical advantage.
Yesterday the big deal was announced. David Cameron and Chinese President signed their nuclear memorandum.
And in a separate deal, EDF, owner of the Hinkley C nuclear power project in Somerset, signed its deal with Chinese state-owned nuclear power company China China General Nuclear Power Corporation.
The government also announced that the terms of its offer to EDF on the Hinkley Plant were finalised. Cue sounds of champagne corks popping, strains of 'for he's a jolly good fellow' ...
But the nuclear deal is not all it seems. In fact it's a veritable dogs' dinner of surprises, quirks and oddities which throw up many more questions than answers.
And it still leaves the key question wide open. Will Hinkley C ever actually be built? For all the claims that EDF's 'final investment decision' is a mere formality that will be made in weeks, it is no such thing.
In fact, there is more reason that ever to doubt it. The official announcement, speeches and press releases may give the firm impression that it's all a done deal. But look harder and it's all stitched together with paperclips and sellotape and could fall apart at any moment.
First, the money - £6 billion is not enough
The first anomaly is that CGN will pay £6 billion for a 33.5% share in the Hinkley C project, presumably buying into what is now a wholly-owned subsidiary of EDF, the NNB Generation Company (NBB GenCo).
That's on the basis, claimed by EDF, that the project cost will be £18 billion. Now if that were the case, that would leave EDF with another £12 billion to find. Which is still a lot of money. But in fact, it's much worse than that.
But the cost has been reliably estimated by EU Competition Commissioner Joaquin Almunia at £24.5 billion - including the considerable costs of financing the construction through to completion. In fact, he warned that if the project encountered problems the cost could end up as high as £34 billion, a figure accepted by EDF boss Laurent de Rivaz.
Given the massive problems encountered at the other sites using the same EPR reactor design, it would surprise no one if huge problems were encountered. The Flamanville EPR project in France and the Olkiluoto EPR project in Finland are both running roughly three times over the initial project cost and nine and eight years over time, respectively.
The Ecologist also understands, following information from a well-placed industry insider, that construction ceased at the 4-reactor EPR project in Taishan, China, in mid-2014. This has not been officially announced. EDF owns 30% of the project, and CGN, EDF's Hinkley C partner 70%.
It would be foolhardy indeed to go enter into the Hinkley C EPR project without having a secure funding line for, say, £25 billion lined up. Without that, investors in the project would risk running out of money before completion - with billions of pounds sunk in a doomed project.
Seen in that context, CGN's £6 billion investment is nowhere near enough. So where might the other £19 billion come from?
Raising debt not an option
The obvious answer is debt. You go to the bank, and borrow the money. But then this is a risky business. China Development Bank, Bank of China and Société Générale are already heavily exposed to Taishan and may now have cut off new funding to the project.
But that's alright, isn't it? Because the Hinkley C project has had £17 billion of UK Treasury Construction Finance Guarantees approved by the European Commission. An initial £2 billion was recently announced by Chancellor George Osborne during his recent visit to China.
These guarantees will grant security to bondholders in the project ensuring that their capital and interest are paid no matter what.
But there's a catch. Under the deal agreed with the Commission, the Flamanville EPR project must be up and running before the guarantees come into effect. And until that time, the shareholders must provide billions in 'contingent equity' to cover the bondholders' risk, protecting UK taxpayers.
Flamanville was meant to be finished in 2012, but it's running late thanks to severe technical and safety problems, and under the latest project update, EDF does not expect it to be complete until 2020. And under the terms of the Commission's approval, if Flamanville is not up and running by the end of 2020, the UK's guarantees expire and bondholders must be repaid from shareholder equity.
What this means is that there is now a near-zero chance of these guarantees ever actually being taken up. Osborne's £2 billion promise in Beijing was a smokescreen. And without those guarantees, who is going to lend their money to the project?
The difficulty has been as good as admitted by EDF, which states, "The project is due to be equity funded by each partner, at least during a first stage."
So what's left?
That leaves EDF with two options. One is to sell additional equity in the project, and the other is to self-finance. Selling more equity in Hinkley C is certainly possible, even though the only buyer is likely to be CGN or one of its companion Chinese nuclear parastatals.
However EDF insists that it will keep a majority share in the project. So it can only sell a maximum of 15.5% to keep its own 51% - say for around £2 billion. Which still leaves it £17 billion short of the £25 billion it needs to be safe, and £10 billion short of its own cost estimate.
EDF can also self-finance and flog off its assets. And that's exactly what EDF is doing - seeking to raise €10 billion by selling its Italian subsidiary Edison and its share in US nuclear company CEGN, and possibly a Polish coal mine, as reported in the FT. But that still leaves it many billions of pounds short.
The company could also take on more corporate debt. Except it's already carrying far too much. According to a Bloomberg report in February this year, "Electricite de France SA's new Chief Executive Officer Jean-Bernard Levy is struggling to control the utility's ballooning debt as Europe's biggest power generator faces an investment peak this year ...
"Net debt climbed 2.4 percent to 33.4 billion euros ($38 billion) last year ... EDF has committed to turning a negative cash flow of 4 billion euros last year into a positive one after dividend payouts by 2018. Levy must rein in debt as the company funds investments of 55 billion euros through 2025."
"EDF's debt is increasing each year, that's one of my biggest surprises when I arrived", Levy told Bloomberg and other reporters. "My biggest astonishment was maybe the fact that cash flow was significantly negative."
As for selling shares into the market, there may be few takers. EDF's falling share price has given its shareholders a loss of almost 16% over the last year.
Heavy demands on EDF cash
And EDF's problems don't end there. Flamanville problems cost EDF an unscheduled €2 billion last year, with more expected to clock up this year and in years to come. Losses at Taishan have not been declared but are surely running into billions.
And then, there is the Areva problem. Areva, another French parastatal nuclear corporation, is essentially bust thanks to a variety of mishaps including a failed $2.5 billion uranium mine in Canada and its woes at Flamanville, where it supplied a defective steel reactor vessel which has now been incorporated into the structure. It also has problems at Olkiluoto, and at Taishan as well, where it also supplied the reactor vessels which may suffer from the same defects. It posted an eye-watering €4.8 billion loss for 2014.
The French government's answer is for EDF, which is not quite as bust as Areva, to buy into the company, buying a majority 51% to 75% stake for €1.3 billion to €2 billion. But of course the liabilities won't end there - as a basket case company with rising global liabilities Areva is sure to soak up more cash for many years to come.
And then there is the potentially enormous cost that EDF faces going forward in decommissioning its ageing fleet of nuclear power plants in France, the UK and other countries - just as its revenue stream from those reactors is cut off. These and other factor led Moody's to downgrade EDF's credit rating in April with 'negative outlook'.
Another surprise - a twin EPR for Sizewell
In a footnote to EDF's press release comes another big surprise. The Sizewell C nuclear project in Suffolk is use a twin EPR design presumably modelled on Hinkley C:
"EDF and CGN have signed the Heads of Terms of an agreement in principle to develop Sizewell C in Suffolk to a final investment decision with a view to build and operate two EPR reactors. During the development phase EDF will take an 80% share and CGN will take a 20% share."
It's a surprise because most people have written off the EPR as a dead duck reactor. Following its Olkiluoto experience, for example, Finland has cancelled a second EPR project and no new orders are coming in. But also because its hard to conceive how on Earth EDF could finance its 80% share when it's already facing such a flood of liabilities and demands for cash, and no working EPR is likely to materialise for some years to come.
As for the 'Hualong' HPR1000 reactor design that CGN (66.5%) and EDF (33.5%) are to build at Bradwell in Essex, it's an entirely untested 'never built' Chinese reactor type, that represents a fusion of two other 'never-built' reactor designs, China's ACPR1000 and ACP1000.
The ACP1000 is a purely paper reactor, while 'third generation' ACPR1000s are under construction at the Yangjiang nuclear complex in western Guangdong with a scheduled completion date of 2019. Three actual HPR1000s are under construction at Hualong 1 and CGN's Fangchenggang units 3 and 4, the official 'reference plant' for the design of the UK's Bradwell reactor.
What these have in common with the EPR design is that no actual working reactor of the HPR1000 or its two antecedents the ACPR1000 and the ACP1000 has ever been completed.
So where do we go from here?
There is a very real possibility that EDF will be unable to raise the cash to proceed with Hinkley C.
Not helping EDF is the warning from two leading rating agenices, Moody's and Standard & Poor, to further downgrade EDF's credit rating in the event that it pursues the Hinkley C project, because of the dangers of big cost overruns and delays to EDF's untested EPR French reactor technology.
Indeed Moody's today released a statement setting out its fears in discreet language: "If the decision is eventually taken by EDF to go ahead with the HPC project, its significant scale and complexity are likely to affect the group's business and financial risk profiles, in Moody's view.
"HPC will only be the fifth plant using the European Pressurised Reactor technology to be constructed globally - none of which is operational yet. The risk of constructing the power station to budget and schedule will remain with, and be shared by, EDF and its partners ...
"Whilst the proposed investment will further weigh on its credit profile, the ultimate impact will depend on any mitigating measures that EDF's management may take to absorb the incremental risks associated with the HPC project, including asset disposals."
Huge questions marks must also hang over the Sizewell and Bradwell nuclear projects - the first saddled with a known failed and never-built reactor design, and the second with a never-built reactor design that is a hybrid of two other never-built reactor designs.
China's long term strategic ambitions
But for all the impediments it's likely that the programme can be delivered, eventually, if China is prepared to pump in enough money - and if EDF is prepared to give up enough control and equity. Which raises the question: What's in it for them?
There is one likely answer. Hinkley C and other planned UK nuclear power stations give them a remarkable opportunity to penetrate and occupy not only the UK's nuclear establishment but France's as well.
With no other investor willing to put money into France's failing nuclear companies or the UK's increasingly desperate nuclear ambitions, China's motivations are surely not purely economic, even if there is money to be made.
It is rather that China has perceived a vulnerability and has decided to exploit it for its own long term strategic, industrial and geopolitical advantage. Remember here that the UK and France are both nuclear weapons states and permanent members of the United Nations Security Council increasingly seen as punching above their weight.
Deliberate under-financing is the oldest trick in the book for rapacious venture capitalists. You find a company in trouble, inject some cash, but not enough, and some more cash, but still not enough, and a few years down the line you're either running the company or winding it up and making off with its assets.
It may be that Chinese money will see the Hinkley C, Sizewell and Bradwell nuclear projects carried though to completion, probably accompanied by big Chinese buy-in to Areva and EDF. But China's help will come at a very high price.
Oliver Tickell edits The Ecologist.
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