These risks are detailed in section 2.2.4 “Operational performance – 4A –Management of large and complex industrial projects (including EPR)".
As with any project of this scope, the project presents important risks in terms of timing and budget overruns at the end of the project.
In terms of foreign exchange, c.1/3 of the project costs are denominated in Euro. This exposes both the project and EDF group to the GBP/EUR exchange rate.
Should sterling fall against the euro, the Sterling cost of the project will go up and itsIRR will therefore drop. A hedging strategy has been implemented at project level to limit exposure of Euro spending.
Nevertheless, at EDF group level, a Sterling devaluation will trigger a fall in euro funding requirements and therefore lower Group debt. Given the long-term investment horizon in the HPC project, EDF group is implementing a gradual strategy to cover the risk of an increase in sterling value for its HPC investment. Beyond the commissioning phase, the IRR of the euro investment is mainly dependent on fluctuations in sterling and UK inflation (in relation to the July 2017 baseline), as revenue is generated in sterling and linked to inflation.
The project is exposed to fluctuations in electricity prices beyond the CfD period. A change in the price of electricity of £2015 10/MWh has an impact of 0.1% on the IRR.
Contracts for the Funded Decommissioning Programme (FDP) were signed on29 September 2016. There is a statutory requirement for nuclear operators to have aFDP, under which an independent Fund Company will collect contributions and manage the money built up to pay for decommissioning of the nuclear reactor at the end of the generation.
The Nuclear Decommissioning Fund Company (FundCo) was set up in compliance with the Energy Act 2008 as its purpose is to provide costs of decommissioning by implementing the FDP.
The overall objective of the FDP is to ensure that operators make prudent provision for:
EDF and CGN signed the Sizewell C Project equity documents on 29 September 2016 alongside the HPC contracts, for the development, building and operation of two EPR reactors (3.2GW) at Sizewell in Suffolk.
During development phase previous to final investment decision, EDF’s share is of 80% and CGN of 20%. EDF has planned to pre-finance the development up to its share of an initial budget of £458 million.
Final investment decision is likely to be made by mid-2022. If it is postponed, an agreement should be reached on the financing of the additional costs incurred.
This project is based on the assumption that third party investors will invest a very large majority and EDF plans, at the date of the final investment decision, to become a very minority shareholder with corresponding limited rights and to deconsolidate the project from the Group’s financial statements (including in the calculation of economic indebtedness by the rating agencies). At this stage, it is not certain that the Group will achieve this objective.
This financing model has never been implemented for projects of that scale before and therefore would be one of the largest ever equity issuance and project financing on the European scene. Securing the appropriate risk-sharing mechanism and ultimately the corresponding financing structure ahead of the Final Investment Decision is therefore key for the project, the UK Government and the current shareholders. EDF’s ability to make a final investment decision on Sizewell C and to participate in the financing of this project beyond the development phase could depend on the operational control of the Hinkley Point C project, on the existence of an appropriate regulatory and financing framework, and on the availability of sufficient investors and financiers. None of these conditions are guaranteed at this time.
Failure to obtain the appropriate financing framework and appropriate regulation could lead the Group not to take the investment decision or to take a decision under
less than optimal conditions (see section 2.2.4 “Operational Performance”, risk factor4A “Management of large and complex industrial projects including EPR").
Project development is based on a replication strategy from HPC which should enable costs to be driven down thanks to a decrease in construction costs combined with lower risks. The Sizewell C nuclear power plant would therefore also be based on theEPR technology, EDF being in charge of the replication of the design, and would benefit from feedback and experience from HPC.
The development of the Sizewell C project achieved major steps in 2020. In June, Planning Inspectorate accepted the application for the Sizewell C development consent order for examination. The examination process is expected to start in April 2021, meaning the Secretary of State should make their decision on the planning permission by April 2022. The development consent order document includes a very ambitious target of savings on construction costs to take into consideration the fact that Sizewell C is a second of a kind.
The UK Government made a major announcement end of 2020 to set out how to achieve the ambition to net zero emission in 2050. On 18 November, a 10-point plan for a Green Industrial Revolution was issued, including a commitment to advancing nuclear as a clean energy source, across large scale nuclear and developing the next generation of small and advanced reactors, acknowledging the important role large scale nuclear will play in delivering the UK’s future low-carbon energy mix. The UKGovernment will contribute up to £385 million to an “Advanced Nuclear Fund”, of which £215 million will be invested in the development of British Small Modular Reactor (SMR) technology. The remaining £170 million will be dedicated to are search and development programme on Advanced Modular Reactors (AMR).
Building on this plan, the Energy White Paper released on 14 December 2020 sets out the steps the UK Government will take over the next decade, including the ambition to bring at least one large scale nuclear project to the point of FinalInvestment Decision by the end of this Parliament period (2024), subject to evidenced value for money and the satisfaction of the UK Government’s legal, regulatory and national security requirements.
In parallel, the UK Government stated that it was to enter talks with EDF on the funding of the Sizewell C project as it considered options to deliver this ambition. The Government also stated that it continues to explore a range of financing options for new nuclear including the Regulated Asset Base (RAB) funding model. In addition, given the scale of the financial challenge, the UK Government could consider participating in financing during construction, provided there is clear value for money for consumers and taxpayers.
The cooperation between EDF and CGN encompasses the process to obtain the design certification of the Chinese-based design HPR1000 in the UK (UK HPR1000) by the Office of Nuclear Regulation and by the Environment Agency through the Generic Design Assessment (GDA) process. For that purpose, EDF and CGN have established a joint-venture, General Nuclear Systems Limited (GNS) (33.5% EDF –66.5% CGN). The GNS joint-venture Shareholders’ Agreement was signed on 29 September 2016.
The HPR1000 technology has been developed by CGN with a reference project under construction in China (FangChengGang 3-4).
The GDA is a 4 steps process, which started in January 2017, the first three steps have already been successfully achieved. Step 4 started in February 2020 and should be completed in the first quarter of 2022. Nevertheless the Environment Agency has told CGN that it must resolve at least six safety issues before it can move forward and the analysis is currently ongoing.
In parallel, EDF and CGN signed the Bradwell B Project Shareholders’ Agreement on29 September 2016 which sets out the framework for the development of a nuclear generation facility at Bradwell-on-Sea using the UK HPR1000 technology. To date, during development phase prior to final investment decision (FID), CGN has a 66.5%interest and EDF of 33.5% interest.
