Business Blunderers #1 - cont: it gets funnier

Continuing the story of Sir Archibald Forster's Big Business Blunders ...

For a period in the 1980s, the old monopoly British Gas had been paying ever higher prices for new long-term purchase contracts from North Sea gas producers: it was a sellers' market.  This came about from an archetypal monopoly planning cock-up: they'd contracted vast quantities of gas in long-term contracts during the huge boom of the late 1960's, priced in single-digit pennies per therm.  Being thus sated, they'd bought very little in the 1970s.  One day, they re-did the supply/demand sums and noticed - guess what? - a looming shortage!  Owing to the low gas price and, at the same time, booming oil prices after the twin crises of 1973-4 and 1979, everybody was exploring only those hydrocarbon plays that looked set to yield oil.  And new gas developments take several years to bring on stream.  

So, being a monopoly and not caring what things cost (they know who's gonna foot the bill, haha!), BG did the rounds, telling everyone that they'd be willing to pay more than 20 p/th - a gigantic price increase - for any new gas supplies that anyone could develop.  (The output of an entire field would be sold under a single contract for decades of delivery, years in advance.)  This sent every NS producer back into the vaults where they stored their old drilling logs, looking for long-forgotten gas discoveries they’d ignored as being totally uneconomic at those 1960’s prices.  Sure enough, new gas fields began to be offered and, true to its word, BG started a price-ramp of several years for new gas that by the mid 1980s saw prices in the high 20s of p/th.  A classic sellers' market phase in the great commodities cycle. 

Though no gas expert, Archie, headstrong Esso Chairman & CEO, somehow got it into his head there was no end to this ramp.  Esso had enjoyed a couple of big sales at stonking prices in this period, and one of his JVs now had a couple more new gas fields to offer BG.  Forster decided that he would triumphantly be the first to breach 30 p/th.  He convinced the JV partners to go along with an eye-watering opening offer of 34p.  Many of us were unconvinced, but were willing to go along for the ride.   Unfortunately, thus emboldened, Forster flamboyantly guaranteed to his Exxon overlords that a price in the 30s would in due course be delivered.  Sadly, he’d failed to notice the laws of supply and demand grinding slowly into action.  High prices bring forth, errr, lots of supply; and he’d not heeded warnings that a glut was coming inexorably down the production-line.  

When his hapless negotiators rocked up at BG, in response they got given a long and detailed list of new fields currently on offer.  BG stated it would only need to buy a couple of these, and told them to go away and recalibrate their aspirations to less than half of what they’d walked in the door with.  Yep, we were now in a buyer's market.

Cue carnage at Esso: was this right?  Why didn’t "we" see this coming?  Etc etc - the usual search for scapegoats.  It would have been fun to be a fly on the wall when Archie broke the fell news to his US masters; but BG was right: it was indeed sitting on a glut, as a bit of belated due diligence readily confirmed.  For its new gas fields Esso subsequently settled for 16 p/th**.  A salutary tale indeed. 

So many life-lessons - as my 11-year old granddaughter would say.

ND

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**  There's another lesson here.  In order to "justify" asking for 34p/th, the negotiators had been primed to say that detailed engineering confirmed this was nothing more than was needed, based on the ever-rising cost of offshore development.  Gosh, yes.  The JV had indeed concluded internally that a price in the high '20s was needed, even if 34 was taking the piss.  So: how come we didn't pack our bags and just go home, sadder and wiser, and leave the stuff in the ground?  

Answer: huge engineering projects build up serious momentum (see HS2, Sizewell C etc etc).  Big project teams had already been assembled: plum jobs awarded: a great deal of engineering work already done: we were not about to walk away from these sunk costs.  The teams were told to take out their sharpest pencils and bring the costs down - massively.  And lo - they succeeded!   As I've found many, many times in business life, engineers, like so many of the rest of us, are basically lazy and complacent; and if they think money is no object, they pile it on.  ("Safety" is the usual reason given for gold-plating - and who dares to second-guess them on that?)  But if they are told their jobs depend on it, suddenly they are capable of amazing innovation and rationalisation!  It is ever thus.  Only a good kicking does the job.

UK nuclear madness

Always remember what we said here a very long time ago: the whole point of France's nuclear policy is to get other nations to underwrite their astronomical nuclear liabilities.

This is precisely à propos of Mr W's prompting BTL here (he'll kindly correct any details that need correcting) ...

*   *   *   *   *

The Hinkley Point C / Sizewell C story so far:

When EDF (together with Centrica & later still the Chinese) acquired the old British Energy in 2008, they were immediately set on building more of their EPR design of nukes in the UK: HPC was nominated to be the first.  Recall that until after the 2005 GE, Blair was set against a nuke revival which he'd believed to be electoral anathema: but various voices** persuaded him it was a Good Idea.   EnSec at the time was of course ... Ed Miliband.  EDF had the effrontery to announce an HPC start-up date of 2017, and that it wouldn't require a penny-piece of subsidy - the latter line being official government policy up to and including the awful Chris Huhne (remember him?)  

Next milestone event was Fukushima 2011 which, to be fair, was outright force majeure and caused significant mods to be made to the design of the structure in which the EPR reactor would be housed.  OK, so the costs went up as a consequence.  But that was the last externality that EDF can truly be excused of: covid might just also creep in to the reckoning, but not inflation, their other bleat.

During the regime of Ed Davey - to be fair, egged on by that git George Osborne - suddenly EDF was going to get subsidised.  We have written about the awful HPC CfD contract many times here.  It has only one saving grace, on paper at least: project cost overruns are solely for the account of EDF / the Chinese (who've now buggered off) / Centrica.  But given the outrageous one-way changes subsequently made to the CfD in EDF's favour, at EDF's demand, even this is of little comfort.  The project overruns are horrendous; and we know EDF will hold a gun to HMG's head for outright cash subventions at some point.  (Personally I suspect this has already happened, disguised as SZC payments, see below.)

To repeat: once the Fukushima design changes were made, everything subsequently is down to EDF's monstrous incompetence.  EDF hints that UK regulators have kept tinkering unreasonably with new design demands, but remember: the CfD states that unless a new regulation could have reasonably been foreseen by EDF, the latter is indemnified against extra costs arising.  So we can put 'costly regulatory tinkering' out of our minds.

Fast-forward to SZC

EDF, of course, realised even before the ink was on the CfD (which they only signed because they thought Brexit would scupper the project altogether) that they couldn't carry out SZC on the terms explicitly for SZC itself that are actually contained in the HPC contract (i.e. for SZC as a put-option for EDF).  So they carefully played a lobbying game resulting in Boris agreeing to finance SZC on a US-style 'rate base' footing (i.e. underwritten directly by taxpayers) - and then, got HMG to stump up hard cash: a billion here, a couple more there ...  now the cash commitment has hit £11 bn of taxpayer money, rather than the usual 'stick it all on the electricity bill'.  AND - amazingly - although EDF has yet to take FID on SZC, the new reactor is already under construction in France, paid for by us.  FFS !  Talk about "too big to fail" ...

*   *   *   *   *  

So now we loop back to the very first line of this post.  Also, we should stew in the details of how badly in trouble HPC is, and how cash-strapped and liability-riddled EDF is in general; how much HMG needs French cooperation on the Boats issue; and the perennial suspicion the whole civil nuclear programme is there to underpin the military nukes ... and you have a recipe for an ongoing haemorrhage of taxpayers' cash that starts to look seriously injurious.  And in the middle of this, Miliband thinks he can get electricity bills down!

An appalling tale - egregious even by the standards of HMG cockups and nuclear age skullduggery.  I have nothing against nukes in principle: but in practice they just never add up.  If we wanted an SZC, let it be remembered that by far our best-performing nuke has been SZB.  We should have 'simply' (hah!) built an updated SZB. 

ND  

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** including one G.Brown, brother of whom worked for, errrr, EDF

General - if you follow the tags, you'll find loads more C@W posts on these topics.

The Sizewell C 'RAB' Abomination

A couple of weeks ago at Mr Wendland's prompting, I undertook to post on the putative Sizewell C contract, currently "under negotiation" with EDF and various financial parties.  I'd said it was worse than the Hinkley Point contract - hard to believe, but true.  We know it will be on a "Regulated Asset Base" footing, which has been used in the USA and elsewhere since time immemorial but in this SZC manifestation has some nasty new twists.  Other aspects are broadly known, but as with Hinkley, the final document will be secret, so there's always a limit as to what we'll get.  (There are aspects of Hinkley we only know because the EC published them.) 

Anyhow, I was duly working up a post; but this morning have been handsomely beaten to the punch by the redoubtable Citizens Advice in their response to a consultation.  Well, a very big hat-tip to them, and here's the link.  Adjusting for the fact that their language is naturally diplomatic, you can't do better than read this to get the full horror of what's being proposed.  It's only 16 pp - but if you're pushed for time, just the first 3 pages gives you the basics.

ND

Government introduces its stellar defence procurement skills to energy sector!

+ + UPDATED + +   - see below

Defence projects are the bane of the taxpayer's existence.  (Along with NHS IT projects, PPS procurement etc etc etc).  Astonishing delays, budget over-runs, faulty products - all followed by rinse-and-repeat with exactly the same contractors.  Learn nothing; repeat; and get the same results.  Never fails.

And now we have HMG's pathetic attempts to get a new generation of nukes up and running.  I say 'new', but the EPR is by now a pile of discredited and distinctly old crap.  And yet, conned by EDF, stitched up by George Osborne, bullied by Francois Hollande and betrayed by her own personal weakness of character, in 2016 Theresa May signed up for the Hinkley Point 'C' contract, the exact terms of which we may never learn: but we know enough to say they are awful.  All the optionality - and it's very great indeed - lies with EDF.  What's more, EDF knows that if it huffs and puffs and lies a bit more, it can get unilateral, favourable changes to this one-sided contract that are even further in its favour.  For example, not long ago it obtained a three-year relaxation to the back-stop date for start-up, from 2033 to 2036.  That's for a project it initially said would start up by year-end 2017! (sic)

So after this week's update from EDF, where are we now?  Start-up-date maybe 2031 or 2032 ... cost, well anyone's guess really, but wildly higher than any number floated before.  And this just days after HMG put around £2.5 bn cash (that's c.a.s.h., upfront, not just a high HPC-type electricity price) into Sizewell 'C', the next monstrous would-be product of EDF's nuclear fantasy.  The big difference with SZC being that, unlike HPC where EDF has to swallow the over-runs, with SZC the taxpayer will do that because EDF has no intention of taking on any construction risk at all.  And Boris signed up for that (not just May, then, who's an airbrained git).  

Did I say EDF has to swallow the over-runs on HPC?  Well, thus far, that's what the contract says and that's how it looks.  But, lo!  The contract doesn't commit them to finish the project at all !  They just don't get to sell that pre-priced electricity if they don't.

However, we can all picture the scene.  It is 2034.  HPC looks sort-of finished, but beneath those big domes and concrete silos, vital bits are not yet ready - and EDF knows full-well they ain't gonna be finished by 2036.  So there will be no juicy, HMG-underwritten, 35-year electricity contract.  They've been cap-in-hand to President Le Pen for more money, but she's sent them away empty-handed.

They know what to do.  "Get Starmer in here" they shout, and he's duly brought in to hear their story.  

"Look here, Starmer, we've run out of money.  But you need the electricity really badly, right?  This HPC delay, and the parallel delay at SZC, have already scuppered your energy strategy, which assumed that BOTH plants would be up and running by 2030! (aside: hah!  that Ed Miliband, eh?  Sucker!!)  You've had three years of patchy blackouts already.  So: we need another, errr, let's say £4bn - well, make it £5bn, what's that between friends, hmm?  Now.  Cash.  And then - we PROMISE - we'll be up and running by Xmas 2037, just, errr, 20 years late.   And we'll have another little meeting - about SZC - next month.  Whadya say?  You don't really want to leave this thing standing here like a radioactive white elephant, do you??"

Watch and wait...

ND

UPDATE     ... but you won't be waiting for long!  See this story - published after I wrote the above post.  You (maybe) read it here first

Winter draws on ...

 ... and we are in better shape than might have been the case, all things being considered.  Don Cox noted BTL that the Rough gas storage facility has started up again** - a very curious, nay, fishy 'miracle', as we've noted before - albeit at 20% of its former capacity: but every little helps.  Several UK coal plants have been revived, to be on standby in case the gas runs out and the wind doesn't blow.  And the Germans have moved mountains to get floating LNG receiving import facilities online, again with the caveat that the volumes won't be as great as all that.  They nearly made their ambitious gas storage inventory targets before going into winter, too.  They, also, have been busily reviving coal, and indeed lignite plants for reserve duty.  And they've done what I and others thought was probably not possible, in squeezing a few extra months out of the nukes that were set for closure.  This wasn't possible with Hinkley Point B in this country, despite government pleading and financial blandishments: HPB was closing (and has indeed closed, as of August) due to age and infirmity, whereas the German nukes were closing by political fiat.  That doesn't mean Scholtz will get any more months out of them next year, because the supporting infrastructure has been shutting down, too.

Several other EU nations, notably the Spanish, have been preparing very well, too.

On the supply-side downside, the French are again falling hugely short.  Their nuke fleet was staggering back to its feet for winter in a partial way, after extensive safety-related closures, only to be hit by a wave of strikes.  Well, there you go, Macron: it's a continuation of massive imports and the highest (wholesale) electricity prices in Europe for you, then. 

This is also proving very costly for Germany, too - but I always said nobody should bet against their ability to put their shoulders to the wheel.  You have to laugh when Macron throws a strop when it's announced by Germany that they are budgeting EUR 200 bn for their energy measures.  Merde! That will distort the European energy market!  Well what did he think:  the richest nation in Europe would volunteer to freeze, out of fellow-feeling for the Frogs?

Talking of distorting the market, France is also desperately trying to get the EC to introduce a "cap on wholesale gas prices" - whatever that might conceivably mean in a truly global gas market.  I won't bore everyone with my endless refrain that most European politicians don't understand how markets work.  I used to finger the Germans most specifically for this, but it now looks as though most of the top players in Scholz's government have taken some rapid lessons on this topic since February, and know the score a little better.  Tough titty, Macron - but you had it coming.

I only hope the new government here looks him squarely in the eye and tells him he can forget any hopes for Sizewell C he might have nurtured on behalf of the French équipe nucléaire; not on the terms he had in mind, anyhow.  We've had enough of PMs bowing the knee to EDF in these matters.

Hold tight for the coming winter.

ND

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** Anon asked:  anything to do with the cost of gas futures at the mo? And the implications for Russia / Middle East LPG. 

The forward market is in very strong contango at the moment (having been for months in backwardation, which some theorists say is impossible for a commodity like gas).  This betokens market sentiment that for right now (i.e. until really cold weather strikes) Europe is looking OK for gas supply - a function of all those efforts noted above - and that winter 2023-24 now looks to be the big problem, despite some some idiot political pundits saying the coming winter will be the last we need to worry about.  Fully-laden LNG tankers are stacked up off the Atlantic coasts of UK / France / Spain, effectively acting as floating storage.  So yes, Anon, Rough (and UK plc) is in a position to benefit from this current situation.  Rough, as you prob know, is 'seasonal' storage, i.e. designed only really for a single annual cycle of injection and withdrawal; and although there's plenty of volatility across the whole forward curve (which benefits such facilities) it pales into insignificance compared to the vol in the spot and short-dated markets, which benefits facilities with much shorter cycles (e.g. 1 or 2 months).  I hope (but rather doubt) that HMG allowed Centrica to get on with their 'Rough miracle' without public money; because Centrica has played a pretty shifty game on this. 

Whilst on the subject of storage economics: as you'd expect, owners of grid-scale batteries, limited though they are in capability, have been making a fortune for more than a year now: ditto owners of gas-fired peaking plants.  Vol is the main play in town, now that simply going long isn't a one-way bet any more.  For example, the current gas market contango will reverse in a matter of days if a Beast from the East hits (energy beast, that is - not Putin again).

Incidentally, the personal burnout in energy traders has to be seen to be believed.  Initially they were just making fortunes; but now liquidity and credit issues are bearing down on them, and they can drop $10m on a cargo of LNG as easily as make it, in the touch of a button.  Hairy times. 

UK Nukes, part 3: FFS, why?

OK, so HMG is hell-bent on Sizewell C, to the extent that they are kissing the Frenchman's arse to get it done.  Since last week's announcement there has only been bad news from France, on Flamanville and the operations of the existing French fleet.  This follows upon well over a decade of nothing but bad news on the EPRs; so why SZC will be any better, no man can tell.  If ministers had half a wit, but were still that determined to go ahead, they'd be striking a much harder bargain than appears to be the case - and experience tells us the actual bargain will be even worse than anything that's ever made public prior to the inevitable public inquiry that will follow when everything goes pear-shaped.   (For a modest fee, I offer to act as commercial consultant in the matter.) 

Even if were to be concluded on intelligent commercial terms, literally nobody would dare hazard a guess as to when this chunky bit of capacity would come on line.  That's pretty dreadful for long-term planning in a perilously-balanced sector of crucial national importance; and gives the lie to the "only nukes deliver predictable baseload electricity at scale" line, which is about all EDF has to offer.

The question therefore arises: why in the name of Hell is HMG so bent on SZC?

Here are three answers:

1. Keynesian job creation.   That's the explanation I have always favoured.  You can see the attraction of HPC, for example: a project creating thousands of fairly decent civil engineering jobs (albeit the workforce holed up in portakabin hotels in the middle of Zummerset is not a particularly happy body of men) that drags on for year after year, being paid for by the French & Chinese, at their ultimate risk.  RAB-financed SZC, though, looks to be under-written by HMG and paid for concurrently on electricity bills - a rather different equation.
2. Support for the UK nuclear deterrent.  They bang on about this at great length at SPRU (Sussex University), essentially suggesting that the civil nuke programme is tacitly subsidising the military.  Maybe: it's not something I've ever studied: and I'm instinctively suspicious of deep-state conspiracy theories.  But the logic is obvious enough: you can take a look for yourself.  
3. A new one:  getting HMG off the legal hook.  So I now add this 3rd explanation: HMG can use SZC as something rather concrete** they can adduce in front of the judge as evidence they are actually doing something - however crass.  I've written here before about the stupidity of legislating for targets like Net Zero 2050 by making them "legally binding".  It simply invites court actions by the Green Blob, and indeed the courts gratify it by entertaining them, and sometimes finding in their favour.  Just last week, the High Court agreed that HMG's NZ2050 strategy was too woolly and has given it a few months to sort it out (plus costs for the Blob).  This is of course bloody ridiculous, but what does anyone expect?

What do readers think?  What other explanations might there be?  Is anyone convinced by SPRU's military hypothesis?  

Over to you.

ND  

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** and I do mean concrete - unbelievable amounts of the stuff, even more than at HPC: 40% of the new plot they'll be building on at the northern end of the site is bog, with very poor and deep underlying bedrock.   EDF screwed up the geology at Hinkley, so the scope for real and very costly nonsense at SZC is huge. 

New nukes in the UK - part 2

So EDF won't (and, by itself, can't: it's bankrupt) take construction risk on nukes any more (Part 1).  But it needs to parlay its supposed expertise into anything that can defray its appalling future liabilities and monetise its sunk costs - at other nations' expense.  Hence, its relentless pressure on HMG, (a) to proceed with Sizewell C, and (b) do so on a completely different financial footing to that of Hinkley Point C.  Oh, and (c) HMG must put its hand in its pocket right away to fund the ongoing engineering, because "EDF has almost run out of money".  And HMG has agreed.

The new finance basis will be "Ratable Asset Base", whereby approved developments call on guaranteed periodic payments from, well, taxpayers ultimately**, during the construction phase.  The logic is, this reduces risk to the point where cheap institutional finance will swing in, attracted by the state-backed cash-flow stream.  By "reducing the cost of capital significantly" vs the "commercial" margin EDF claims it needs to charge in return for taking construction and cash-flow risk on (e.g.) HPC, the overall cost - which was always to be borne by UK bill-payers anyway, if over many more decades - is brought down by a noticeable amount.  In capital intensive sectors, attracting the least-cost capital has always been vital (true).  As a throwaway line it is added that RAB is how loads of big infrastructure projects are financed in the UK and elsewhere (true): and of course almost the whole of the US utility sector has been built on this basis (also true).  How heartening!

Heartening for the French, maybe, but open to many heavyweight challenges.

• EDF, having just been re-nationalised, is now essentially the French state, which can raise money (almost) as cheaply as any western nation.  If they are so strategically keen on SZC, let 'em get on with it.  They already have a put option for the project, complete with UK-guaranteed electricity price.
• Yes, RAB is used in big infra projects.  The difference is, those are traditionally based on conventional technology, proven construction methods, and low strategic risk.  SZC?  Pull the other one: it comes from a stable with truly appalling previous in these matters.  To trust them to get their act together on this one, in the face of all history, is some kind of madness.  RAB as 'conventionally' practised is not at all suitable for nukes: ask the Americans, who've tried it.
• In particular, tax-payers are open to the following scenario (as HMG freely admits).  SZC construction gets underway, and taxpayers make regular payments, year by year.  For the first N years, the work is all civil engineering anyway (HPC is still in the civils phase, five years after commencement), and the construction risks are moderate (though by no means nil) - so the chances are, the payments will properly fall due, more or less.   After several billions of this and a monstrous scar inflicted on the East Anglian countryside + precarious heritage coastline, EDF says that's it, we're stuck - we need a lot more £££, in order to finish the project.++  HMG says 'no'.  EDF declares its project affiliate bust, and says, maintenant mes braves, whatchagonnado?  There is no answer to this question, short of having the French government guarantee construction which, naturellement, it refuses to do: that's the whole point!  So the UK taxpayer bears the ultimate risks of construction, delay and budget overrun, as part of its exposure to (it bears repeating) an organisation that is legendary for its grotesque, world-scale failures in all these regards.  
• It's not at all clear big institutional money is looking for the kind of home represented by SZC.  Nuclear risk lies at the heart of this, despite attempts to dress up the financial proposition as just another annuity stream.  In particular, everyone knows the Big Contract between HMG and EDF will be secret.  So the institutions will also ask for secret protections - and they won't take their sharpest pencils to the rates they charge, either - if indeed they are interested at all. 

This is just the headlines of the RAB stuff:  I'm not even talking about the massive strategic issues of (e.g.) China having a 20% stake that needs squaring away; and whether a large chunk of deeply uncertain nuclear capacity commencing probably 10 / 11 / 12 years from now (who'll ever have a firm handle on that?) can contribute meaningfully to a national electricity requirement which places an ever greater premium on reliability, flexibility, and certainty in both these vital dimensions.   Still less am I addressing the plethora of SZC- and East Anglia-specific environmental issues involved, which themselves are multi-dimensional and acute.

And yet, HMG ploughs on regardless.  As we said at the end of Part 1:  FFS, why?   Some suggestions towards an answer in Part 3 ...

ND

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** I say 'ultimately taxpayers' but in the first instance it will probably be electricity bill-payers.  Not a huge amount of difference, in practice. 

++ Ample proof of EDF's approach to contractual obligations comes very recently from this FT revelation: 

EDF is in negotiations with the British government over penalty clauses in [the] agreement struck in 2013 to finance the building of [HPC]. The subsidy deal guarantees EDF a price [for] electricity it produces for the first 35 years of its life ... Penalty clauses ... reduce the 35-year term if Hinkey is not generating electricity by May 2029 [by] one year of guaranteed payments for every year of delay up to 2033. If the delays extended beyond that date the government has the option to terminate the subsidy contract. EDF ... has repeatedly pushed back its completion date while costs have spiralled. In the latest setback, EDF warned ... that the first of Hinkley’s two reactors would not be completed until June 2027 .... [and] the company cautioned that there was the possibility of a further 15-month delay to September 2028, adding that date could slip again ...

New nukes in the UK: Sizewell, RAB etc (part 1)

For well over fifteen years here we've periodically asserted that France has a critical strategic objective of getting other nations, not least the UK, to pay for its monstrous nuclear liabilities.   As soon as EDF came away with Osborne/May's outrageously generous gold-plated deal for Hinkley Point C, they started lobbying for the next one, Sizewell C (CGI above); and - significantly - that this should be on a different contractual basis.  To remind ourselves of the salient details of HPC, bad and good:

• there is no HPC completion date!  In fact, EDF isn't obliged, contractually, to build it at all!  
• ... but if they don't, all the ever-increasing sunk costs are for the account of the project (80% EDF, 20% the Chinese)
• any problems encountered along the way that are down to HMG, and most specifically any more-than-trivial changes in nuke-related regulations, are for the account of HMG (even if, for example, another nuke accident happens somewhere in the world that inevitably means every government everywhere will insist on a new type of widget being fitted on all nukes everywhere).  In other words, EDF - arguably the world's leading nuke institution - refuses to accept fundamental nuke-risk
• the electricity sales contract strike-price (technically a CfD) of £92.50/MWh, was base-year 2012, indexed to inflation (it is now well over £100).  At the time that was some three times higher than prevailing wholesale baseload electricity, although obviously it looks a lot better right now, as our good friend Mr Wendland noted BTL the other day
• the HPC deal gave EDF a put option on SZC at £89.50 (indexed) (which would then apply to them both); said (by EDF) to be a good deal at the time, since "of course" SZC would be cheaper to build than HPC, being able to call on all the HPC experience and the established construction labour force etc.
• any problems encountered along the way that are NOT down to HMG are for the project's account
• certain very mild contractual disadvantages (I won't call them penalties because they are trivial) kick in if EDF isn't finished by 2029; and the whole contract is cancelled in they aren't finished by 2035.   This for a plant that EDF told us in 2008 would be operational by Xmas 2017! 

But, pleased though they were to get this deal inked in 2016, this wasn't good enough for EDF - a company that is technically bankrupt, although as a recently fully-re-nationalised French state entity, this might not be as fatal as it would be for most companies being relied upon to undertake huge and critical enterprises.  Why not good enough?  Because EDF retains HPC construction risk, and is only remunerated (if at all ..! - see 2035 above) via electricity sales in due course, albeit at a price underwritten by HMG.

Construction risk?  Well, needless to say, at HPC there have been many problems along the way.  Obviously Covid wasn't expected - although hey, any firm undertaking projects with a construction period of more than a decade, and a lifespan of maybe a century, had better reckon on Shit Happening, no?  But Brexit happened before the contract was signed, so no sympathy there.  And likewise no sympathy for the many purely technical and design cock-ups perpetrated by EDF and its (mainly French) major contractors, e.g. getting the geology wrong on the bedrock at Hinkley, FFS.  So costs have been steady rising, and timetables steadily slipping.  Oh yes, there's construction risk aplenty.

So what about SZC?  Surely, as we've been assured by EDF ad nauseam, just as HPC was going to be a breeze, because of the prior experience obtained with EPRs at Flamanville (France) and Olkiluoto (Finland), so SZC in its turn would be an absolute shoe-in.  Hah!  All three European pre-SZC EPR projects have been fiascos; and the two EPRs built in China, apparently much more efficiently and on time / on budget, are in trouble already: one is shut down and the other on limited running, due to unresolved problems that the French nuke authorities are very troubled by.

And aside from the entire history of EPRs, there are SZC-specific reasons to believe it'll be more costly than HPC.  I won't bore you with the details, but every site is always different and SZC will bring all manner of new challenges, some of them pretty fundamental.  Nothing that engineers can't solve, mind - at a cost ...

SO.  We can easily see why EDF refuses to bear construction risk at SZC.  They are "even more bankrupt" today than they were in 2016.  In the next post we'll look at how HMG proposes to steam ahead with SZC anyway - and we'll ask the obvious question:  FFS, why?

ND