Overnight has come what may prove to be a really good piece of news for the UK economy. One way of knowing this is to note that there are vested interests against it as illustrated by this from the BBC.
Hinkley Point delay is a high-stakes bet by government
Actually I agree with that but for opposite reasons. You see the original plan was a high stakes bet because of this.
Oct 2013 – UK government agrees £92.50 per megawatt-hour will be paid for electricity produced at the Somerset site – around double the current market rate at the time.
I always thought that we ( the UK taxpayer) were overpaying for this future supply of electricity which at full output would be around 7% of the total UK supply. Since then the world of power supply has changed in many ways. One of these is represented by the way that the oil price back then was in an era christened on here as being like it was influenced by a US $108 per barrel tractor beam. Now as I type this Brent Crude Oil is below US $43 per barrel.
We cannot directly translate lower oil prices into lower domestic energy costs for two reasons. Firstly we use related but not the same products such as gas for example and secondly we are looking a long way into the future. But there have clearly been ch-ch-changes. For example if we look at the official data for industrial energy prices (excluding climate change levy) the index was at 123 in 2013 and 124.9 at the start of 2014 but was 106.4 in the first quarter of 2016. So if we were overpaying back then the situation has got worse.
I found myself in City-AM today with this view.
Hinkley Point looks ever more like an economic disaster waiting to happen…
This now comes into the story and let me highlight it by something which did not change this morning. From the Bank of Japan.
The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen.
This has led to a situation where as I discussed yesterday Japan can borrow at -0.17% for ten years and indeed did borrow at 0.35% for forty years earlier this week, We can see a similar situation in Europe where the ECB (European Central Bank) is buying some 80 billion Euros of bonds a month as it too chomps away on them like a powered up Pac-Man. This too has led to a large grouping of negative bond yields and even Italy with its banking problems can borrow for 10 years at 1.2% as I type this.
So the “bond vigilantes” were routed in the same manner as General Custer at Little Big Horn. We know live in a world where we see both negative interest-rates and yields fairly regularly. There are various estimates around of how many bonds are now offering a negative yield and the largest I have seen was for US $11 Trillion but of course the exact number changes frequently.
The UK Specifically
Apart from a brief post Brexit referendum surge in UK Gilt prices in the 3/4 year maturity zone the UK has avoided negative Gilt yields. However we are seeing what are for us all time lows in yield and highs in prices. Let me illustrate with some tweets by me from yesterday.
The UK 5 year Gilt yield had a closing low of 0.3% today! Think of fixed-rate mortgages if you think that doesn’t matter.
The UK ten-year Gilt yield fell to 0.7% as we saw all-time lows in such measures. However I was already thinking of the implications for Hinkley Point.
With the thirty-year UK Gilt yield at a mere 1.6% it must be cheaper for the UK to build
What was happening with Hinkley Point?
The BBC put it thus about the funding.
French firm EDF, which is financing most of the £18bn Hinkley Point project in Somerset, approved the funding at a board meeting………They are also concerned that the plant is being built by foreign governments. One third of the £18bn cost is being provided by Chinese investors.
Actually there were doubts about whether EDF ( mostly owned by the French government ) could afford the project including on its own board.
Ahead of Thursday’s vote on whether to approve the project, an EDF board member, Gerard Magnin, resigned, saying the project was “very risky” financially……Earlier this year, EDF’s finance director, Thomas Piquemal, had resigned amid reports he thought Hinkley could damage EDF itself.
The fundamental issue here was that it was UK policy under Chancellor Osborne to reduce UK borrowing and the national debt so we ended up with this as described by Michael Liebreich.
Between them, chancellor George Osborne and DECC secretary Ed Davey agreed that the private sector would bear the risk of constructing and operating the project, at a stroke doubling its cost of capital and cost of power.
Meanwhile in a universe far far away we could have been taking advantage of France’s ability to borrow extremely cheaply ( ten-year yield 0.13%) although the irony is we did not know hat back in 2013! There would be a wry amusement in Mario Draghi and the ECB financing UK nuclear power.
Could EDF build it anyway?
There are genuine questions on this front as shown in this from Anthony Hilton in the Evening Standard from January.
But its two previous attempts to build this kind of reactor have been troubled. One in Normandy was budgeted to cost €3 billion (£2.8 billion) and be ready by 2012 but it will now not be finished until 2018 and the cost has more than tripled to €10.5 billion. The other in Finland is 10 years behind schedule and at least €5 billion over budget.
What could go wrong?
The financial world has changed so much since 2013 and I gather that the world of nuclear power has to as we face the fact that the words White and Elephant may be used as often as Hinkley and Point. The simple fact is that we could borrow the money for the project much more cheaply as a nation than the proposal here which pretty much looks like a ruse to keep the funding and cost off the UK balance sheet. how did a similar effort called PFI (Private Finance Initiative) end up? If we did the borrowing ourselves then currently the 50 year Gilt ( 2068 actually) yields less than 1.5% according to Investing.com.
The technology effort is much more complex as we have some ability via Rolls Royce and submarines but we have not ventured into this arena for decades. I know that some of you have expert knowledge in this area so I will be interested in your views on newer technologies including nuclear. unfortunately the clock is ticking because successive UK governments have ignored the area of energy supply putting us in something of a mess.
An official report has been highly critical of the IMF. I would just like to repeat what I wrote back on June 8th 2010.
It has plainly changed from an organisation which helps with balance of payments problems to one which helps with fiscal deficits. Whilst this may suit politicians, taxpayers and voters should in my view be concerned about the moral hazard of one group of politicians voting to increase funds available to help another group of politicians which may include themselves.
Me on Official Tip-TV