On November 23rd, Financial Times Energy Editor, Andrew Ward, wrote, ‘energy consumers face paying £30bn above market prices for electricity for Hinkley over the 35-year life of the contract’. He was in error. The actual additional cost to consumers is £59bn.
In his defence, Mr Ward can fairly claim that he has accurately reported the figure given in the Public Accounts Committee’s devastating report on the Hinkley deal. The Committee wrote: ‘the Department estimates that top-up payments will cost consumers around £30 billion over the 35-year contract.’
Unfortunately, the Department’s estimate is also wrong.
The arithmetic is straightforward. The current wholesale cost of electricity is £42/MWh. EDF is guaranteed £109/MWh for Hinkley’s electricity. Consumers will pay the difference between the wholesale cost and the guarantee. That is £67.
Hinkley’s capacity is 3,200MW. No power station operates 100% of the time. Hinkley is expected to operate 90%. Consumers will therefore have to pay £67 x 3,200MW x 0.9 x 24hrs x 365days x 35yrs.
This comes to £59.2bn which is the additional amount that will actually be added to consumers’ bills.
Is this simply a basic error in simple maths by the Department? I suspect not. The £30bn amount is not what consumers will pay, it is the present value of what consumers will pay.
That is, it is the amount consumers will pay discounted back to today. However, the guarantee to EDF is index-linked. This means the cost to consumers goes up with inflation.
In other words, the number you discounted to get the £30bn figure will be inflated by the same amount. This gets you back to the actual £59bn. There is no reason in economic theory why you should discount an index-linked amount back to its present value. There is however a very clear political reason for replacing a £59bn bill to consumers with £30bn bill.
November 23rd 2017