Hinkley Point – is the new nuclear deal on or off?

Just as the FT’s reports from Tehran show that there is a long way to go on one nuclear deal, so it also seems that negotiations on the £16bn plan to build new nuclear for the UK at Hinkley Point in Somerset are far from over.

When agreement between the UK Government and EDF on the strike price was announced six weeks ago the impression was given that the deal was done. This is not correct. Numerous details remain unresolved, opposition to the costs involved and the structure of the deal has mounted and, crucially, the financing has not been agreed. Full-scale construction work cannot begin until the funding is in place. The key lies with the Chinese.

As David Cameron arrives in China on yet another trade mission, he will be uncomfortably aware that while the two Chinese companies involved have agreed to invest “in principle”, they have set conditions which have to be met before anything is signed.

The Chinese want confirmation that the deal does not breach the Brussels rules on state aid and subsidies. The rules are probably flexible enough with some pressure from the French to allow the deal through, though a disinterested Martian looking at the arrangements objectively would surely conclude that the rich mixture of state guarantees, contracts for difference and prices indexed-linked for 35 years can only be described as a subsidy. The mixture is certainly not available to any other part of the energy sector.

The real issue though is that the Chinese want confirmation – in writing if not in blood – that they will be allowed to build and operate a future nuclear station in the UK. They are interested in being a global player in the nuclear business – not in being a passive investor. On numerous occasions they have been told, very politely, that this is not on offer. The hope behind the visit of the trade delegation which Mr Cameron is leading is that over time China will become a normal trading partner, dealing on the basis of reciprocity and transparency. That would be a great step forward but it means, among other things, ending the large scale computer hacking from Chinese sources which imposes huge costs on both business and government. The Chinese seem to manage to block their own citizens from using Google but not to be able to stop the hacking. If normality could be established direct involvement even in sensitive sectors would be welcome, though there are still some who regard the nuclear sector as fundamentally strategic for the UK’s security.

These are big, complex issues. In a world of global capital, boundaries are not what they were. The business world loves open trade, but politics and security are still national concerns. Independence and discrimination against capital from particular sources is all very well, but what happens if no one else is willing to invest?

The net result is that the Hinkley Point deal is not done. The French companies cannot approve the investment until the financing package is clear. If the Chinese do not sign up soon, the other potential investors – officially unidentified but lets call them the Qataris – will also very sensibly hold back. One answer might be for the UK government to make the deal even more financially attractive to get in other investors – but that risks a rejection not just by Brussels but also in the UK parliament where there is growing resistance to a deal which, on the basis of the details published so far, offers EDF a return in excess of 20 per cent and the prospect of being able, as soon as the plant is built, of monetising the forward cash flow. If you think about it a bond based on an index-linked price guaranteed by the UK government for 35 years would be a very attractive proposition. Anyone wanting to understand just how the lavish the current deal is should read an excellent paper by Peter Atheron of Liberum Capital headlined, appropriately, “Flabbergasted”.

In Tehran, the nuclear deal appears to have been announced before the details were properly agreed in order to give President Barack Obama some political relief from his domestic problems. In the case of Hinkley Point, the reason for a quick announcement was the UK government’s desperate desire to produce some sense that the UK economy was thriving and that investment was going ahead. In both cases, putting short term politics ahead of detailed substance could prove very damaging.