What does Hinkley Point mean for energy bills?
The board of EDF Energy has now approved the investment decision to build two nuclear reactors at Hinkley Point C in Somerset in England.
Subject to getting the final go ahead following a review of the project by the UK government, the £18bn capital project is currently expected to come on stream from around 2025 and is expected to generate 7% of the UK's electricity.
The £18 billion investment will be financed by EDF Energy and China General Nuclear Power Corporation (CGN), which has taken a 33% stake in the project.
The project has attracted a degree of controversy not least because EDF Energy has managed to negotiate a guaranteed selling price ("strike price") of £92.50 per MWh (inflation adjusted) for a period of 35 years.
To put that into context, a price of £92.50 / MWh (9.25p / kWh) is currently TWICE the price at which electricity can be purchased in the wholesale energy markets.
Whether that turns out to be a good or bad deal for UK energy consumers only time will tell. This is a very long term project and energy markets are very volatile. We are not going to pass judgement on it here. Our intention is to assess what it means for energy bills.
Impact on energy bills
According to the BBC, apparently the government insists that consumers will pay about £10 a year for Hinkley Point C, although they have not provided any justification for the figure.
We think the impact on energy bills will be greater. This is what we believe it is going to cost (very roughly).
The average annual electricity bill in the UK stands at around £500.
Of that £500, 50% (£250) represents the cost of the electricity purchased, the balance being made up of non-commodity costs (transportation, metering, environmental, operations, profit etc.).
Hinkley Point C is expected to generate 7% of electricity demand and this 7% will cost twice the current market price. So all things being equal, compared to today's prices, the impact on energy bills will be...
[(£250 * 7%) * 2] + [(£250 * 93%) * 1] - £250 = £17.50
Actually that could just be written as (£250 * 7%) but we wanted to show the working.
£17.50 does not sound like much but multiply that by 35 years and you get £612.50 over the life of the project.
But there is more bad news on energy bills
There is more to worry about than Hinkley Point C.
If the cost of Hinkley Point C sounds scary, then you will have nightmares when you read this.
According to the Competition and Markets Authority (1) ....
"On the basis of current announced plans, DECC estimates that climate and energy policies will add 37% to the retail cost of electricity prices paid by households in 2020."
37% equates to an increase of £185 on an annual electricity bill of £500 over just 4 years.
In comparison, the effect of Hinkley Point C on energy bills will be relatively tame.
But that is not all the bad news hitting consumers right now.
Back in June 2016 we warned that energy bills had bottomed and all the risks were pointing to energy price rises.. Well that call turned out to be bang on the money. Energy bills have already risen by £25 to £30 with more to come.
Joe Malinowski, founder of award winning energy price comparison website TheEnergyShop.com commented.
"Hinkley Point, if finally approved, will put upward pressure on energy bills. But at £17.50 per household it is a drop in the ocean compare to the £185 increase that government climate and energy policies will add in just the next 4 years."
Joe Malinowski continued;
"It would be good to say that the news is better in the short-term - but it isn't. Energy prices have already started to creep up and we expect more to follow."
"The saving grace for consumers is that switching energy supplier from a Standard tariff gets you an immediate saving of £320. That will offset 18 years of Hinkley Point electricity price inflation."
Notes and Sources
1. CMA Energy Market Investigation; Provisional Decision on Remedies - 17 March 2016
For further information about EDF Energy please read our review.
Published 1 August 2016