World Nuclear Association Blog

Does the UK’s Contract for Difference provide a level-playing field between nuclear and renewables?

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Greg Kaser
Senior Project Manager

 

Greg Kaser WNAThe European Commission is investigating whether the UK Government's proposals to support the construction of the Hinkley Point C nuclear power plant is legitimate under European Union competition rules. Plenty of people think that EDF, the company standing behind the nuclear station, will be receiving a pretty generous subsidy to the detriment of alternatives. The Guardian newspaper (3 March 2014) quoted the chair of the UK and Ireland association of Nuclear Free Local Authorities, Councillor Mark Hackett, as saying that the project is "the most expensive" power plant in history and "could choke off the nascent renewable energy revolution in the UK [and] turning off investors in offshore wind and solar at a time when such industries are rapidly taking off elsewhere in Europe". Another critic, Peter Atherton of Liberium Capital, a London-based broker and corporate finance advisor, asserted in The Spectator magazine (22 February 2014) that the government "has agreed to buy electricity at twice the current market price … which looks like financial insanity".

This is also one of the possible concerns that the European Commission is examining. In a letter to the UK Government on 18 December 2013 the Competition Commissioner Joaquín Almunia indicated that it was not clear whether the Hinkley Point C project would "crowd out" other low-carbon technologies, such as biomass, hinder the import of electricity from the rest of Europe, and reduce the incentive to improve energy efficiency. 

The Commission's careful language, however, indicates that not all is what it appears. Firstly there is nothing in the UK Electricity Market Reform package that disadvantages renewable energy sources. Renewables are offered the same help as nuclear power: they are eligible for an infrastructure investment guarantee from the government and a Contract for Difference arrangement to help them finance their projects, whether it is the biomass conversion of the Drax coal-fired thermal power plant or for an off-shore wind turbine. The government published indicative 'strike prices' for renewable technologies in the range of £95 to £305 per megawatt hour in December 2013: <link>. It has also agreed a strike price for Hinkley Point C of £92.50/MWh, below that available to any of the low-carbon alternatives.  

Secondly, many people fail to appreciate that the strike price in a Contract for Difference (CfD) is not a guaranteed price for the electricity. A CfD is a bet between the generator (the punter) and its counterparty (a special government-sponsored enterprise) on the outcome of the competition to sell into the electricity market. If the outcome is a power price (the 'reference price') higher than the bet (the 'strike price') then the generator compensates the counterparty; if the power price turns out to be lower than the 'strike price', then the counterparty compensates the generator. This bet is linked to the sale of the electricity by the power generator. If Hinkley Point C fails to sell its power to the grid then it receives no revenue and no compensation (or penalty) from the CfD. Like any other generating plant Hinkley Point C will have to compete in an open market to sell its power. On a windy day it might not be able to beat the price offered by a wind turbine array in the Bristol Channel. In fact, and thirdly, the wind array has an additional advantage since renewable energy sources have priority access to the grid. If anything, the playing field is stacked against nuclear power in favour of renewable energy sources and there is no reason to suppose that competition between generators within the UK or abroad will be distorted as a result of the proposed strike price.

De-carbonizing the electricity system is not a cheap option but without a slice of nuclear power for the around-the-clock base-load generation the transition will be more expensive than it needs to be. If the government did not support alternatives to fossil fuels then greenhouse gas emissions would continue to grow, as the German electricity market demonstrates. The UK has a deregulated and unbundled energy market and the contract for difference is a way of persuading generating companies to invest in low-carbon technologies which otherwise would not make business sense while preserving competition between electricity suppliers.