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Topic Title: Yet another Financial Times 'Nuclear Deal at Hinkley Point C' about to be done story
Topic Summary: Third Gen Nuclear Negociations, the neverending story...
Created On: 03 October 2013 02:02 PM
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 03 October 2013 02:02 PM
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jarathoon

Posts: 1040
Joined: 05 September 2004

To celebrate the fact the Financial Times has written yet another "the Hinkley Point C deal is just around the corner" story I have written about the secret deal negociations using the metaphor of building and renting a house, so people can understand the issues a bit more detail.


We want to build a house...(a metaphorical story to help explain the nuclear new build contract negotiations now proceeding in secret session some where in Britain)

"We want to build a house, however we can't borrow the money to build and run our own house, we don't have the skills to built houses anymore and no one trusts us to deliver. However if you build our house for us, borrowing the money on our behalf, we will pay you between 2 and 3 times the normal going rate for rent, for the next 40 years guaranteed!

Even if rents on other properties don't increase over this period, we promise to raise our rent with CPI inflation year on year, even in the years during which you build the house. If you can't afford to borrow the money yourself, we will find a way of guaranteeing the loan, we have friend at the Treasury who can do a loan guarantee for us at a discount rate; as long as it is not us taking out the loan they don't mind (I don't think they trust us).

Don't worry you can take your time building the house, we won't need to live in it for at least another 10 years. And if the building work over runs and costs balloon, that doesn't matter either, we can always renegotiate the terms of the deal at a later date to help you out.

And don't worry about the costs of running the house on our behalf, we will put a maximum cap on all payments you will have to pay to handle and dispose of the household waste, even if the local council refuses to cooperate with our strict demands.

Unfortunately we need to store our waste in strict isolation for tens of thousands of years into the future and the council don't seem to understand or want to play ball with us. Don't worry we have ways of fixing the game.

And don't worry about paying commercial insurance premiums for negligence and accidents, you don't need to; you just need to pay a one off small excess payment to us in the event anything goes wrong.

Oh and don't worry about staff training costs we've got those covered as well.

And if you want to run the building company as a limited liability enterprise which can go bust with no come back to your parent company that's fine with us as well. The only slight problem is that our contact in the treasury is a bit grumpy at the moment, so you may not be able to run your building company from a tax haven and avoid paying the UK income tax due. Don't worry we're working on that one on your behalf.

Even if for some unknown reason we do not need to rent the building ourselves in ten years time we will guarantee that someone else does, even if there are lots of cheaper houses going empty just around the corner.

We can pull a few strings and effectively bar people from renting these cheaper houses, until someone comes and rents yours; it doesn't matter how many empty houses there are going empty and how many homeless people we create in the process, our first duty will be to you our builders.

It's really been a pleasure negotiating this contract I hope you appreciate the effort we've put in.

What's that, you can't borrow the money even with a guarantee from the treasury, because some of your building work has gone wrong and over budget elsewhere.

Don't worry about that we can always find you a business partner, who is credit worthy. I have been talking to a financier in China who can help us out...we'll get back to you in a few weeks"


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James Arathoon
 03 October 2013 02:27 PM
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jarathoon

Posts: 1040
Joined: 05 September 2004

The BBC has also run a story quoting the FT...

"Hinkley C nuclear plant deal 'within weeks' of completion"

http://www.bbc.co.uk/news/uk-24377296

The E&T have run the story here this time quoting from the "Finacial Times"

http://eandt.theiet.org/news/2...inkley-point-deal.cfm

"According to the Finacial Times, UK's energy minister Michael Fallon said he was "working intensely" to close the deal after a lengthy negotiation process. "We're not quite there yet, but I hope we will be in the next few weeks," Fallon was reported to say."

Neither makes any reference to the number of times the FT has previously run this same story...



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James Arathoon
 03 October 2013 02:38 PM
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jarathoon

Posts: 1040
Joined: 05 September 2004

The independent has the same story here

"Government within 'weeks' of Hinkley C nuclear plant deal"

http://www.independent.co.uk/n...ant-deal-8855989.html

"UK's first nuclear power plant for a generation could be built in Hinkley"

http://www.telegraph.co.uk/ear...built-in-Hinkley.html

"Fallon predicts Hinkley nuclear deal 'within weeks'"

"http://www.building.co.uk/news...0%99/5061631.article"

The Media has gone in to overdrive on this one...

Although just a few days ago utilityweek were running this story

"Davey prepared to walk away from EDF deal"

http://www.utilityweek.co.uk/n...-from-EDF-deal/917372

"The energy secretary has said he is prepared to walk away from negotiations with EDF over a strike price for new nuclear if he doesn't "get the right price"."

Today it looks like any price is the right price.



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James Arathoon
 05 October 2013 02:40 AM
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poo

Posts: 227
Joined: 07 May 2008

If we still have to throw shedloads of taxpayers money at EDF to get them to build a new nuclear power station, why did we sell the power stations? We are no better off. All you can say is the true cost of nuclear power has been exposed.
 05 October 2013 11:38 AM
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westonpa

Posts: 1771
Joined: 10 October 2007

What you need to understand James is basically and for the most part politicians and senior civil servants are going to make decisions which are in their best interests and not your best interests. Do not expect the media to sort it out either, if they sorted it all out they would have no stories to sell their papers etc. Do not expect businesses to sort it out either because they make their money from it and will do their best to ensure ex ministers or else their relatives end up in jobs/positions which directly or else indirectly benefit. Today's politicians, well they will be Lords and Dames or else in retired wealth when the issues from these deals come into play....and you know what, that will just give the politicians and media of the day something to sort out and something to write about. In addition to that it will present opportunitites for more businesses to benefit from the proposed solutions.

It's your children and grandchildren who will pay for today's decisions and who really cares about it because for the most part the public are ignorant until such time as it has a significant direct effect on them or their family, and at which time they complain. Then of course the media write about it and the politicians of the day have something to sort out......and so it goes on.

PFI was a bad deal but it went ahead. Blair went into Iraq and that was another bad deal. Brown sold off Gold cheaply and completely failed to foresee the financial mess or else manage it properly, either as Chancellor or PM. Now tell me which one of those two has received any sort of sanction?

No sanction for bad decisions means no reason to concern about making poor decisions.

Regards.
 05 October 2013 02:18 PM
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jarathoon

Posts: 1040
Joined: 05 September 2004

Originally posted by: poo

If we still have to throw shedloads of taxpayers money at EDF to get them to build a new nuclear power station, why did we sell the power stations? We are no better off. All you can say is the true cost of nuclear power has been exposed.


Cost is a difficult cost concept because there are budgetary costs, estimated costs, actual costs, opportunity costs and political costs. There are wholesale costs and retail costs. There are capital costs, running costs, maintenance costs, waste costs and decommissioning costs.

In terms of the new contracts for difference subsidy system the government is trying to foist on us, there are some significant complexities to the cost calculations (especially when the system is viewed from a consumer perspective).

On top of the market price of electricity there will be the intermittent reference price, the baseload reference price and the strike price.

The government has yet to decide how the baseload reference price will be calculated.

Some prices paid in the week vary on short time scales and some are agreed a long time in advance. Presumably the weekly baseload reference price must bear some relation to the weighted mean market price paid over the course of a week taking account of all the wholesale contracts for electricity purchase whatever their timescale.

The CFD counterparty must note how much electricity the Nuclear generator has sold in the last week as well as calculating the reference price (the mean market price paid over that period) that applies. It then makes a calculation

Energy Cost Difference = (Strike Price - Reference Price) * Energy Sold into Grid in the Accounting period chosen

If the Reference Price is less than the Strike Price then the CFD Counterparty needs to pay the generator the Energy Cost Difference.

If the Reference Price is greater than the Strike Price then the generator needs to pay the CFD Counterparty the Energy Cost Difference.

The normal situation will be that the strike price is greater than the reference price, so levy payments will generally flow towards the generator.

Now the CFD counterparty needs to add on its costs and the taxes and charges the Treasury makes for services rendered. So the Levy to be collected for the week for that particular generator will be

Levy to be Collected = [(Strike Price - Reference Price) * Energy Sold into Grid] + CFD Counterparty Costs + Treasury Financing Charges and Taxes

The CFD counterparty now repeats this for all the remaining generators with CFD agreements (baseload and intermittent).

The CFD counterparty now has to collect this total sum from the Energy Retailers, who sell the generators electricity minus the grid losses.

Lets just consider a simplified system of just six retailers and simplified system of cost allocation, that ignores the costs that are not proportional to the energy transferred through the network.

Now at the end of each energy accounting period (e.g. weekly) all the retailers have to determine how much electricity they have sold.

This figure will be part estimated and part based on actual meter readings. They also need to supply corrections relating to previous accounting periods.

Each of the Retailers sends in the figures for the amount of electricity it has sold in the accounting period to the CFD counterparty. The CFD counterparty then calculates the proportion of electricity sold by each retailer in that accounting period.

Levy Bill (Retailer A) = Total Levy to be Collected for the Quarter * Proportion of Total Electricity Sold by Retailer A

The retailer pays this Levy, adding on a handing charge or profit marging. It also pays a CFD administrative charge to National Grid (and possibly DECC and the regulator as well). All these costs can then be charged on to the consumer. If VAT is due on the levy it will be added on at the bottom of the Consumers Energy Bill.

The retailer then bills the energy customer somehow and pays the aggregate Levy that they owe to the CFD counterparty at some point.

Thus from the consumers point of view the Levy paid on the bill very complicated and not easy to calculate, even for the most simple model I can imagine. (see below)

For each quarter (13 weeks) the variables at the very least consist of

- Strike Prices for all the generator
- 13 weekly Baseload Reference Prices (2184 hourly day ahead Intermittent Reference Prices will be calculated apparently, but lets ignore the added complexities involved there)
- 13 weekly figures for the electricity sold into the grid by each generator
- 13 weekly figures for the Total Energy Sold into the Grid
- 13 weekly figures for the proportion of energy bought by the consumers energy supplier
- correction figures for previous accounting periods (this is going to be really complex I expect)
- CFD Counterparty handling charges
- Treasury financing charges and taxes
- National Grid handling charges
- Electricity supplier handing charges
- Possibly the VAT rate
- Grid loss Accounting Figures (Remember the customer pays the levy for electricity lost in the grid as well)
- If Scotland vote for independence and withdraw from the system the levies will then just be spread across English and Welsh consumers.

In practice it is going to be a lot more complicated than this, and they may choose a shorter accounting period for baseload energy supply.

To write a computer program to account for how the actual levy figure on a consumer's quarterly bill is actually broken down would probably require several thousand lines of code and tons of data.

On top of all this someone has to regulate and verify that the system is working correctly.

All I can say is my brain hurts....and that I have no idea what the eventual costs of third generation nuclear to the consumer will be.

James Arathoon

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James Arathoon
 05 October 2013 02:42 PM
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jarathoon

Posts: 1040
Joined: 05 September 2004

Originally posted by: westonpa

What you need to understand James is basically and for the most part politicians and senior civil servants are going to make decisions which are in their best interests and not your best interests. Do not expect the media to sort it out either, if they sorted it all out they would have no stories to sell their papers etc. Do not expect businesses to sort it out either because they make their money from it and will do their best to ensure ex ministers or else their relatives end up in jobs/positions which directly or else indirectly benefit. Today's politicians, well they will be Lords and Dames or else in retired wealth when the issues from these deals come into play....and you know what, that will just give the politicians and media of the day something to sort out and something to write about. In addition to that it will present opportunitites for more businesses to benefit from the proposed solutions.



It's your children and grandchildren who will pay for today's decisions and who really cares about it because for the most part the public are ignorant until such time as it has a significant direct effect on them or their family, and at which time they complain. Then of course the media write about it and the politicians of the day have something to sort out......and so it goes on.



PFI was a bad deal but it went ahead. Blair went into Iraq and that was another bad deal. Brown sold off Gold cheaply and completely failed to foresee the financial mess or else manage it properly, either as Chancellor or PM. Now tell me which one of those two has received any sort of sanction?



No sanction for bad decisions means no reason to concern about making poor decisions.



Regards.


I have already given notice that I support the introduction of a new law so that the civil servants and ministers involved negligent behaviour or indeed complexity and impractical policy decisions that collapse under the weight of their own inconsistency and unpopularity will be laible to have their pension assets retrospectively surcharged (up to 20%).

However they don't seem to believe this will ever happen (even though I have given them due notice) and therefore I agree they see no serious prospect of this sanction being applied to them personally. They implicitly believe (wrongly) that government will always opperate in the way it opperates now.

Given the pensions that some ministers and civil servants receive, the new law will perhaps be like caning a naughty boy with a feather.

Oh well the principle would be there, even if the deterrent effect is in practice a small one.

James Arathoon

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James Arathoon
 05 October 2013 03:48 PM
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westonpa

Posts: 1771
Joined: 10 October 2007

The only real solution James is to run for office and get enough like minded people to do the same and then change the laws.

Regards.
 06 October 2013 03:39 PM
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jarathoon

Posts: 1040
Joined: 05 September 2004

The telegraph story today is interesting because it highlights what is really now happening in the New Nuclear at any cost negotiations.

Hinkley nuclear deal hinges on profit sharing

Contract for Difference arrangement in spite of being specifically designed for new Nuclear, have two very serious downsides from the point of view of the government and EDF (one downside each in fact).

The downside of Contracts for Difference Subsidy Regime from EDF's point of view

EDF's downside is that they do not cover the construction risk. If they start building the power station and the project has construction delays, the limited liability corporate shell subsidiary company (NNB Generation Company Limited) that actually builds and runs the power station is very vulnerable to going bust if things go wrong during the construction phase, as it has no other income streams or assets to call upon in terms of collateral.

If NNB Generation Company Limited went bust the public would take over the government guaranteed investor loans (up to £10 billion in value) and the company and its unfinished building site would then be effectively nationalised.

The EDF parent company would incur substantial losses, on any equity stake they held and any inter-business credit arrangements that were not covered by the loan guarantees.

Smaller suppliers with trade credit agreements not insured under the loan guarantee could lose out badly if things went wrong, and a large array of smaller suppliers are vital to getting a nuclear power station built.

EDF are asking for government guarantees to cover construction risk, because otherwise the EDF parent company ( and Areva its other subsidiary) is going to have to put up collateral in the process of setting up the new lines of credit NNB Generation Company Limited needs from the supply chain.

The EDF parent company cannot do this, it has huge debts of its own. Its parent company, the French government, also has huge debts and no wish to create vast new liabilities in foreign countries, just to build a nuclear power station. The French government has also had its fingers burnt with the EPR's currently being built in France and Finland.

There we have it, EDF needs the British taxpay to take on the entire liability for the construction overspends, they cannot proceed withotu this guarantee.

The downside of Contracts for Difference Subsidy Regime from the Government's point of view

Government's don't mind spending our money. In fact they love spending our money. The more the better it is for them. The downside of Contracts for Difference from the Government's point of view is not how much taxpayer and bill payer money is to be spent building new nuclear power stations.

The problem for the government is that once the nuclear power station is built, inflation proofed strike prices quickly become a license to print money (given most of the out goings (loan repayments) don't increase with inflation). NNB Generation Company Limited will be able to refinance its loans at lower interest rates once evidence for a dependable income stream emerges and this will make this problem worse.

The downside of the Contracts for Difference Subsidy Regime as currently designed is that the high guaranteed prices for energy can easily lead to profiteering. This would be extremely unpopular with the public, but this is not in fact the reason why the government considers this a downside.

The downside for the government is that this potential profiteering would only be taxable at normal corporation tax rates (assuming tax haven rules don't apply).

Now from the government point of view profiteering companies are an easy and painless source of revenue.

The "gain-sharing" and "pain-sharing" arrangements are being proposed so the government can claw back excess profits and turn a crisis in energy policy into an opportunity for new taxes.

Therefore before you know it CfD's become a new tax raising ruse as deliberately engineered excess subsidies are increasingly clawed back by government directly into Treasury coffers.

The overall subsidy system, turns into a complex scheme designed to eliminate construction risk, whilst at the same time guarantee a minimum level of profits in perpetuity, however badly the company performs.

Given the inflation proofing of the income stream (most of the loan costs will not be increasing with inflation which is why profiteering can arise so easily) there will be considerable leeway to exceed the guaranteed minimum profit levels set by government even if the power station performs badly and managed inefficiently.

James Arathoon

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James Arathoon
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