Britain signs deal with EDF for new reactors: Nuclear power deal ‘is vital to keeping the lights on’, says Ed Davey

Government agrees to guarantee the French utility EDF about twice current market rate for electricity produced at new Hinkley Point reactors

David Cameron visited Hinkley Point B in Somerset after confirming a £16bn project to build Britain's first new nuclear power station in a generation (AFP/Getty Images)

The Energy Secretary Ed Davey insisted that new nuclear power is essential to keep Britain's lights on as he unveiled a long-awaited agreement to build two more reactors at Hinkley Point - at a cost of £2bn more than previously announced.

After months of wrangling, the government has agreed to guarantee the French utility EDF about twice the current market rate for the electricity produced at Hinkley Point C in Somerset.

Known as the "strike price", Edf and its Chinese partners will receive £92.50 per megawatt hour (M/wh) for its electricity for thirty-five years after production begins in 2023 - whatever the prevailing market price.

This price will give Edf a return of about 10 per cent on its investment, which was the price the French utility demanded in return for the risk associated with such a large and uncertain project.

In the face of criticism that he was paying too much, ensuring further hikes in energy bills that are already squeezing household finances, Mr Davey insisted that he had struck a good deal and one that was essential to safeguard Britain's power supply.

"If people at home want to be able to keep watching the television, be able to turn the kettle on and benefit from electricity, we have got to make these investments. It is essential to keep the lights on and to power British business," Mr Davey said.

He said it would create 25,000 jobs, most of them British, and said up to 57 per cent of the value of the project would go to UK companies.

Mr Davey said that the strike price, of £92.50 per megawatt hour (Mwh) was competitive with other large scale forms of low-carbon energy production and would fall to £89.50/Mwh if EDF proceeds with a second plant, Sizewell C in Suffolk, to reflect the fact that costs will come down with each successive plant as economies of scale kick in.

The price of Offshore wind power is currently £155 Mwh, although it will fall to £135 by 2018 and is expected to continue falling afterwards. Onshore wind is £100 per Mwh, falling to £95 in 2018, with large solar farms at £125, due to falling to £110 by 2018.

While the nuclear strike price is lower than most other forms of low-carbon energy, experts cautioned that, unlike other technologies which are forecast to decline, the Hinkley Point price was frozen for 35 years - or rather linked to inflation.

"It's sensible to have some nuclear power for the sake of energy security and diversity of sources. But this is certainly not a cheap option," said Angus McCrone, of Bloomberg New Energy Finance.

Bloomberg calculates that the cost of gas-fired electricity generation is currently about £55 per Mwh at the moment and predicts that it will be about £74 in 2023 when the new Hinkley Point reactors are set to commence - although the group cautions that forecasting the gas price is difficult.

Concerns that the cost of the Hinkley Point project could continue to rise mounted yesterday as Edf increased its cost estimate of the project to £16bn, from its latest estimate of £14bn its £9bn forecast of December 2010. The company put the increase down to additional work at the site, including more foundation work and adapting the design of the reactor to meet UK regulatory standards.

The European Pressured Water Reactor (EPR) that will be used at Hinkley Point is being manufactured by France's Areva, which is also working on two similar projects with EDF - in France and Finland - which are running over time and budget.

The strike price allows Eef to claim the difference between the wholesale electricity price and the strike price, with the extra being added to consumers bills. Conversely, if the wholesale price rises above the strike price, Edf will have to refund the difference - although analysts believe this is unlikely.

Separately, the government has announced that energy, road and rail projects worth £33bn have passed the first hurdle in getting a government infrastructure guarantee. Forty projects are now at the so-called prequalification stage, meaning they are eligible for the UK Guarantee scheme. They include the Drax Power station, which received a £75m guarantee for the partial conversion of its coal-fired power station to biomass. Hinkley Point C is another example.

Strike prices: How energy is subsidised

The government has agreed to guarantee EDF £92.50 per megawatt hour of electricity – enough to power an average UK household for three months – that is produced at Hinkley Point C for 35 years from the start of production.

Production at the site is due to begin in 2023, meaning the current deal would run until 2058.

This price is known as the ‘strike price’ and is effectively a subsidy to incentivise the development of low-carbon technologies. The Hinkley Point strike price is just over double the current wholesale electricity price of about £45/Mwh which, in turn, makes up about 37 per cent of the average UK electricity bill – the rest is made up of distribution costs, green levies and other supplier costs.

The strike price varies according to the technology in use.

The following list illustrates how the Hinkley Point strike price compares to strike prices for other low-carbon energy sources;

Hinkley Point: £92.50
Onshore wind farms: £100
Offshore wind farms: £155
Biomass: £105
Large solar plants: £125
Hydro electric dams: £95
Anaerobic digestion: £145

Gas-fired power stations are not eligible for a subsidy, or strike price, because their technology is proven and they emit too much carbon.

However, Bloomberg calculates that the cost of producing one Mmh of electricity through a gas-fired power station is about £55, and estimates that this will rise to £74 by 2023 – considerably less than the £92.50 that Hinkley Point will get.

In contrast to the Hinkley Point strike price, which will be frozen for 35 years, the strike prices of the other low-carbon energy sources are current and at least some of them will come down over time.