Commercial awareness: think like a professional about... nuclear power | Commercial awareness on The Gateway

Commercial awareness: think like a professional about... nuclear power

Our banker, lawyer, accountant and consultant comment on the government's decision to build a controversial new power station

The government has announced plans to construct a nuclear power station at the Hinkley plant in Somerset. It recently confirmed it's signed an agreement with French-owned utility company Electricite de France SA (EDF).

The new plant, due to be completed in 2023, will be the first new nuclear facility constructed in the UK since Sizewell B, which was completed in 1995.

This step has been taken to help the government meet ambitious carbon emission reduction targets and to produce a ready supply of energy to help mitigate expected rises in energy costs caused by the overall creakiness of the nation's current power infrastructure.

It's thought that the new power station will generate around 25,000 jobs during its construction and subsequently support 900 permanent employees during its estimated 60-year lifespan.

The power station will be constructed and administered by EDF and it's thought that it will cost £16 billion to build, though the project will not be wholly funded by the French conglomerate.

A 30 to 40 per cent stake will be taken by Chinese nuclear companies China General Nuclear Corporation (CGN) and China National Nuclear Corporation (CNNC). 10 per cent will go to French reactor-maker Areva, who will also play a consulting role on the technology used and the design of the plant. 15 per cent will go to various other parties, yet to be finally determined.

The British government will not contribute to the financing of the project, meaning that it won't cost British taxpayers anything upfront, but they won't benefit from any profits made by the plant.

The agreement signed by the government is not legally binding, and EDF won't make a final decision about whether to invest until 2014.

Thinking like a...

Banker

Project work

Project financing, which is often where banks get involved in infrastructure projects, is a very risky business. Investors in project finance, like the banks who'll be lending funds to EDF and its Chinese partners, are likely to be dependent on the project's eventual revenues to be repaid, rather than having any claim against the project's owners. EDF has run into some problems on other recent projects, which have sometimes come in late and over budget. But, of course, increased risk means that banks can charge more interest on project finance lending than they would on ordinary loans.

Lawyer

Firm commitment

A number of major City law firms have reportedly acted on the Hinkley deal. Herbert Smith Freehills has guided longstanding client EDF through the matter, while Slaughter and May advised the Department of Energy and Climate Change. How will they be helping? Pulling any big commercial deal together requires the assistance of lawyers, and this one will certainly throw up plenty of governmental and regulatory issues for them to get their teeth into. And because it involves significant government investment, the deal is likely to require EC state aid approval in the future - which means even more work for lawyers.

Accountant

Double trouble

As part of the agreement, the government has already agreed to guarantee that they'll buy electricity from the plant at £92.50 per megawatt hour, around twice the current going market rate. Sounds like someone's done their sums wrong - this agreement could mean that an extra £8 on average is added to every consumer bill every year. But the government must be thinking that if agreeing to this price now means they can meet their ambitious carbon emissions target and avoid short-term power blackouts, then they've got themselves a good deal.

Consultant

Eastern promise

What's the thinking behind China's decision to invest in this project? Well, China's own nuclear capability is growing rapidly and the Chinese government would dearly love their nation to become a major exporter of nuclear energy. But the industry in China has been dogged by concerns over safety and the extent of government influence is also a perennial problem for any major Chinese business - the Chinese government owns both of the energy companies involved in the deal outright. Taking part in a major UK nuclear project seems an ideal strategy for establishing China's credibility and reliability in this field.

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