Antony Froggatt
Senior Research Fellow, Energy, Environment and Resources

The British government and France's EDF Energy have reached an agreement for the construction of two reactors at Hinkley point in Somerset, the first new nuclear power project in the UK for decades, and costing around £16 billion for two units. Prime minister David Cameron has welcomed the deal, saying it will kick-start the British nuclear industry.

The deal announcement will come as a relief to both sides; it has been three years since the government announced that Hinkley would be one of the sites considered for new nuclear plants, two years since EDF submitted an application to build, and one year since the construction licence was awarded. However, despite the British government agreeing on a guaranteed fixed price of electricity for 35 years of £92.5/MWh, plus inflationary increases, a number of issues still need to be addressed before construction.

The two most interesting outcomes of the UK's deal with EDF are economic and geopolitical. EDF has been in direct discussion with the government for some years; in 2006, its submission to the government’s energy review stated that the development of a European Pressurized Water Reactor would cost £23.5/MWh (£28.8MWh in 2013 values), compared to the  current strike price of £92.5/MWh. This more than threefold increase, over eight years, puts the cost of nuclear electricity at about double the current market rate, and higher than that produced by both gas- and coal-fired power stations, and also makes it more costly than many renewable energy options.  

The deal also highlights the globalized nature of the nuclear sector. Construction will be undertaken by the French state-controlled company Areva, for EDF, which itself is 85% owned by the French government. However, the project can only go ahead with financing from the China National Nuclear Corporation and China General Nuclear Power Corporation, following the withdrawal of European partners. It is said that the initial share of the Chinese partners will be 30-40% in the project.  

This shows that nuclear construction costs are now so large that they are beyond the financial capability of one of Europe’s largest utility company. Future projects in the UK or many countries will most likely require large international engagement at the level of the constructor, utility or financing. Furthermore, the multinational engagement of these projects requires financial and political support from a number of governments.  

Despite the announcement significant hurdles remain, such as securing EU approval. Earlier this month the European Commission said that it had ruled out revising the state aid rules of energy and environment to include nuclear power. While this is not a final decision, and a consultation process will be launched shortly, this is a reversal of its previous position, which would have put nuclear power on the same legal footing as renewables and thus except it from state aid review. If the commission's new position remains, it will mean a lengthy assessment of up to 18 months. If the proposed deal is rejected it will fall foul of EU competition law which is why EDF has stated that this needs to be clarified before the final investment decision can be taken.

Nuclear contribution to global electricity has fallen from 17% in the 1990s to 10% today, as a result of declining nuclear production and rising demand. Under current trends, its contribution will continue to diminish as investment flows into fossil fuels and renewable energy projects, where in the latter sector prices continue to fall – in the case of solar PV by 80% in the last three years.  

Nuclear rebirth?

Supporters of the industry had hoped that the UK project would signal a revival in the fortunes of nuclear power. However, the Hinkley project has highlighted the costs of nuclear new-build and the extent to which multiple government support and guarantees are required, conditions that may be difficult to replicate in other parts of the world.

Watch Antony discuss nuclear energy on BBC News.