What does the nuclear deal with China mean?

Artist's impression of Hinkley Point C Image copyright PA
Image caption The power station is expected to provide up to 25,000 jobs during the lifetime of the project

David Cameron and President Xi Jingping have signed a deal agreeing to Chinese investment in a new nuclear power station in Somerset.

It will be largest inward investment ever in the UK. France's EDF and CGN, a Chinese nuclear consortium, will build the plant, and possibly two more.

Where will the power stations be built?

The first will be built at Hinkley Point on the Somerset coast, and is expected to open by 2025 at a cost of about £25bn including financing. EDF says the cost in today's money will be £18bn.

China will cover about a third of the cost. EDF said it might sell another 15% stake in the project, but would maintain a majority holding.

This will be the third power station at the site. Hinkley Point A was shut down in 2000, while Hinkley Point B is still in use.

The government insists that 25,000 jobs will be created by the new power station - Hinkley Point C - and enough energy to power six million homes.

Two other stations, at Sizewell in Suffolk, and Bradwell in Essex, are due to follow. The plant at Bradwell is due to be Chinese-designed, which will provide China with its first Western showcase for its nuclear technology.

Is it good news?

The UK government has been criticised for guaranteeing the price that will be paid for any electricity the new Hinkley Point reactor produces. That could mean, critics such as Greenpeace say, higher energy bills for consumers.

Image copyright HayesDavidson/EDF
Image caption Hinkley Point C is set to take 10 years to become fully operational

Security concerns have also been raised about allowing China a central role in Britain's nuclear future.

Is it good value?

Not everyone thinks so. The Solar Trade Association thinks solar power could provide the same amount of electricity for half the subsidy cost.

Policy chief Mike Landy said: "The government needs to explain why it is drastically cutting support for solar energy whilst offering double the subsidy to Hinkley Point C.

"It also needs to explain why it is championing overseas state-backed utilities over British solar companies which given stable support would have considerable growth prospects."

What is this subsidy and why is it needed?

This is the so-called strike price. The previous government said it would not provide any public subsidies to the nuclear industry.

It would not actually be illegal to do so, but the government had to get permission from the European Union, which it acquired for the strike price.

As part of this deal, today's government said it is not continuing the "no public subsidy policy" of the previous administration. Insiders insist this apparent policy reversal is merely a "clarification" that the builders will get some guarantees, and does not open the door for more public money to be used.

How does the price work in practice?

In essence, the government has guaranteed EDF a price of £92.50 per megawatt hour (Mwh), or £89.50 if EDF develops another new reactor in Sizewell, Suffolk. This simply reflects the fact that EDF's costs will be lower per reactor if it builds two of them.

If the market price of electricity falls below this level, the government has in effect said it will make sure EDF receives the difference between the two prices.

The wholesale price of electricity at the moment is about £45/Mwh. If the wholesale price remains at this level, then EDF will receive an additional £47.50/Mwh. In practice, this money will not come from taxpayers (that would count as a subsidy), but from consumers of electricity.

The strike price works the other way as well - EDF has to refund the difference if the price of electricity is above £92.50/Mwh. For example, if the wholesale price is £110/Mwh, then it has to refund £18.50/Mwh. Again, this money goes back to bill payers, not to the government.

But why the need for any guaranteed price?

Nuclear reactors cost a lot of money, and EDF wants to build two of them. The final bill for just Hinkley is estimated at £24.5bn including financing costs. Even for a massive company like EDF, this is a huge investment, which makes it inherently risky.

For example, if the price of electricity falls, or becomes more volatile, the company could lose a lot of money. And because the plant would take 10 years to build, there is simply too much uncertainty to commit to such a huge investment without such comfort, investors would argue.

Image caption There are already two nuclear power stations at Hinkley Point

For this reason, EDF needs an added incentive to build the reactors. Knowing it will receive a guaranteed price for the electricity generated at Hinkley provides some kind of certainty that the investment will be worthwhile - in other words, profitable.

For its part, the government has been unable to play different energy companies off against each other, as German power giants RWE and E.On decided long ago against building new plants in the UK.

It has, therefore, been forced to negotiate with EDF. But this doesn't mean EDF holds all the cards - the company is desperate to get Hinkley Point C started so it can serve as a blueprint for similar power stations across the world.

So what does it mean for bills?

Until we know the price of electricity on the open market when Hinkley Point C starts generating power, we simply won't know if it is a good or bad deal.

If the electricity price is below the strike price, then bills will probably be higher than they would otherwise be. Conversely, if it is above the strike price, then bills would be lower.

Image caption Planned accommodation for Hinkley Point C builders will be based across three sites

It will also depend on the energy mix at the time. In other words, how much of your electricity is generated by nuclear power. At the moment, almost 20% of the UK's power is generated by nuclear reactors, but this is likely to fall in the short term as the UK's current nuclear capacity is decommissioned.

Better-insulated homes and more-efficient gadgets, could also lower usage in the future.

This is all very well, but why are we building new nuclear power plants?

Precisely because there will be a shortfall in electricity generation as a result of existing nuclear - and coal and gas - power stations shutting down. The question then is how to make up this shortfall.

The government is committed to renewable energy, such as solar and wind power, but to get enough generating capacity from these sources will take too long, it says, so another solution is needed.

In theory, it could simply increase power generation from traditional fossil fuels such as coal and gas, but stringent, legally-binding carbon dioxide emissions targets mean this is not possible.

There is some room for an increase in gas-generated power, but as we import most of this gas, the government has concerns about energy security - it wants us to generate our own power, not rely on others for it.

So, in the government's eyes, that leaves nuclear. And it wants EDF to lead by example, paving the way for other power companies to invest in new reactors in the UK, because two new reactors will not be enough.

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