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UPDATE (22/10/15) Thanks to several readers who have written in with feedback. We have updated the article including expanding the quote from George Osborne to show the context in which he made his claim and adding a section on costs other than strike price. (23/10/15) We have also expanded our section on reliability in response to feedback that there are various ways of measuring it.
"The strike price and so on are all subject to any final negotiation. It is still substantially cheaper than any other low-carbon technology, such as offshore wind, or indeed onshore wind, and it has, as nuclear power always has had, that baseload reliability."
George Osborne, Chancellor of the Exchequer, 8 September 2015
"In terms of costs to consumers, the agreed price is horrendous... Even onshore wind is cheaper"
The Guardian, 21 September 2015
The UK might be about to build its first nuclear power station in a generation at Hinkley Point and before the first concrete has been poured there are concerns about how much the electricity it produces will cost.
We've asked the Treasury to clarify Mr Osborne's remarks, but in the context of guaranteed fixed prices (strike prices), new nuclear power is expected to be cheaper than offshore wind but more expensive than onshore wind. It's correct to say wind power is less reliable, based on the assumed availability of the energy over winter months.
The government has guaranteed higher prices for Hinkley Point C than for new wind projects
The government has guaranteed a fixed price for power supplied by Hinkley Point C. For each megawatt hour supplied, the company operating the plant will be paid £92.50. If it goes ahead with a second plant at Sizewell, then the price will fall to £89.50.
In either case, this price is guaranteed for 35 years (although there are some circumstances when it can be changed).
Some new wind projects also receive fixed prices for power generated. Under the Contracts for Difference (CfD) auction system, prices for producers of low-carbon emission electricity are guaranteed fixed prices for 15 years.
For both Hinkley Point C and the CfD auctions, the prices are generally set at a higher level than the expected market price to encourage investment.
The first auction under this system led to guaranteed prices ranging from £79.23-£82.50 for onshore wind, and £114.39-£119.89 for offshore wind. Before the bidding, the government's maximum prices for wind power (both onshore and offshore) were higher than the agreed price for Hinkley Point C, so it's possible that this is what the Chancellor was referring to.
Both the guaranteed prices for wind power and Hinkley Point C are in 2012 prices. As a result, even though wind power projects will be connected to the grid a couple of years before Hinkley Point C, they are comparable.
Hinkley Point C comes online in 2023. The latest offshore wind farms to agree guaranteed prices plan to start delivery around 2018. By 2023, it may be possible that new offshore projects will have been commissioned that will be cheaper than Hinkley.
On the whole, the guaranteed prices support George Osborne's argument that Hinkley Point C will provide cheaper electricity than new offshore wind. However, the electricity produced by the nuclear power plant will be more expensive than new onshore wind.
Other costs to consider
In terms of whether one source of electricity is 'cheaper' than another, the fixed price paid for each unit of electricity is a reasonable starting point for evaluating the effect on consumer's bills. As a number of our readers have pointed out, there are other potential costs, although it's difficult to measure some of these.
For instance, if a scheme receives other subsidies, then the fixed price will understate the total cost to the Treasury and consumers of a unit of electricity.
In the case of Hinkley Point C, the government is offering additional support through the "UK Guarantees" scheme, which supports borrowing for infrastructure projects (including renewable energy). Under this scheme, the government promises lenders that, for a fee, any loans taken out to fund a project will be repaid. This lowers the risks of such projects and can mean lower fixed prices as a result.
The issue of subsidising the decommissioning of power plants and the disposal of waste products can also raise extra costs.
The Energy Act 2008 states that operators of new nuclear power stations should have a 'Funded Decommissioning Programme' which means the operators pay the costs associated with decommissioning the site. Operators must also pay their "full share" of waste management costs.
While the exact details of a "full share" of costs haven't been explicitly laid out, it appears that this refers to meeting the agreed fees for government disposal of waste.
Since the owners of the plant will have to set funds aside to deal with these costs, the strike price is likely to reflect the fact that this increases the cost of running the plant.
And new onshore wind projects may have to be cheaper still
Currently, onshore wind projects can get guaranteed prices through the CfD scheme. However, the energy secretary Amber Rudd has said that she doesn't expect onshore wind power to qualify for this system in the next round of auctions.
The other scheme that supported onshore wind was the Renewables Obligation. The Energy Bill is currently closing this scheme to new onshore wind projects from 1 April 2016 as part of the government's commitment to ensuring that there are "no new subsidies" for onshore wind.
If new onshore wind projects will have to provide power at the market rate, then as the market price for power is expected to be below the fixed price guaranteed for Hinkley C, it's likely that new onshore wind will continue to be cheaper than new nuclear.
The reliability of different power sources is slightly unclear; there doesn't appear to be a single term used consistently across different parts of the energy industry.
The National Grid gives assumed availability for different power sources in its winter outlook reports, which takes into account historical availability and planned outages. The 'availability' of wind power is measured slightly differently.
In this set of figures, nuclear power is more consistently available than wind.
On a similar note, the Parliamentary Office of Science and Technology looked at the contribution of different technologies to the reliability of the overall energy supply.
In 2013, wind power (both on and offshore) could be expected to produce between 7% and 25% of its maximum capacity at times of annual peak demand, with a low risk of this power not being available. Fossil fuel and nuclear plants could be expected to produce between 77% and 95% of their maximum capacity.
Solar power could be expected to produce 0% of its capacity in the hours of peak demand (winter, after nightfall). However, it could be argued that solar power is rather more reliable during the daytime, during its hours of potential operation; it simply cannot be relied upon to be available exactly when power is needed.
Again, on this measure nuclear power was more consistently available than wind.
This doesn't mean that wind power isn't useful. The National Grid's job is to match electricity supply and demand, and to guarantee that this will occur with a high level of confidence. While wind power is more variable, that doesn't mean that it necessarily makes the electricity supply less 'reliable'. A large number of geographically dispersed wind farms can produce a certain amount of electricity with greater reliability, with other types of plant capable of producing on demand filling in.
Nuclear plants don't have to rely on the weather to produce output, and they do produce energy consistently, if inflexibly. But while the variability of wind output does pose a challenge in matching energy supply and demand, as the National Grid has pointed out other forms of energy also present challenges.
Large energy plants like nuclear power stations can have their output "suddenly drop off all at once" when there are technical issues. The output from wind farms "tends to come off more slowly; wind farms have a number of turbines".
Thanks to several readers who highlighted these issues.
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