Hinkley Point C nuclear power station was conceived in the days when offshore wind cost £150 per megawatt hour and a few misguided souls, some of them government ministers, thought a barrel of oil was heading towards $200.
Successive governments swallowed the line that Hinkley represented a plausible answer to the UK’s threefold energy conundrum – keeping the lights on, reducing carbon emissions and producing the juice at affordable prices for consumers and business.
Hinkley still scores on reliability and low carbon (if one ignores the effect of spoiling the Somerset countryside with so much concrete), but the extent to which its costs are obscene is now plainer than ever. In Monday’s capacity auction, two big offshore wind farms came in at £57.50 per megawatt hour and a third at £74.75. These “strike prices” – a guaranteed price for the electricity generated – are expressed in 2012 figures, as is Hinkley’s £92.50 so the comparison is fair.
The dramatic improvement in offshore wind’s competitiveness is easy to explain because it was predicted. The turbines have become bigger and more efficient, installation costs have fallen and operators are able to use existing infrastructure. Even the post-Brexit fall in sterling has not altered the script because more of the equipment is produced in the UK these days.
By contrast, nuclear – a technology that has been around for half a century – seems to only become more expensive in a world of tighter safety regulation. Hinkley Point’s construction tripled between conception and contract, remember.
As for the argument that we must pay up for reliable baseload supplies, there ought to be limits to how far it can be pushed. A nuclear premium of some level might be justified, but Hinkley lives in a financial world of its own, even before battery technology (possibly) shifts the economics further in favour of renewables. A credible energy strategy would concentrate on wind- and gas-fired stations, and invite nuclear to the game only if it can vaguely compete on price.
The government should draw the obvious conclusion from Monday’s successful auction. One Hinkley is bad enough; a series of follow-on white elephants would be a disgrace.
Carillon clear-out sets stage for turnaround
If you’re going to clear out an executive team after a corporate calamity, you might as well do a thorough job. Stand-in boss Keith Cochrane, sifting though the mess at contractor Carillion, has decided his recovery plan, whatever it turns to be, can proceed without five of eight members of the executive committee.
They include finance director Zafar Khan, who has been in post for only nine months but should waste no time feeling sorry for himself. When the numbers are as horrible as Carillion’s – a colossal £845m provision and net debt that had soared to £695m at the last count – any turnaround plan is bound to require a new bean-counter.
Other notable departees include Richard Howson, who was stood down as chief executive after July’s profits warning only to reappear as chief operating officer. Given the 80% fall in the share price, the surprise is only that he got a temporary reprieve.
Cochrane’s clear-out sends a message of determination ahead of the main event, the unveiling of the review of strategy and capital structure at the end of this month. The strategy part should be the simpler: flog any peripheral business that can be sold and, given that Carillion has been felled by just a handful of contracts, take a vow of scepticism on risks in future.
The capital review, think analysts, means either a rights issue or a debt-for-equity swap. The former is preferable but tricky if Carillion, an employer of 48,000 people valued at only £185m, requires the rumoured £500m. Still, a new line-up of managers, and a temporary hire from Ernst & Young as “chief transformation officer”, meets one minimum condition of a self-help story to pitch to investors.
A second requirement is a parallel cull of the non-executive directors. Philip Green, former boss of United Utilities, has been chairman since 2014 and his dispatch to shareholders in last year’s annual report now reads as a risible piece of corporate hubris. One trusts his resignation letter, assuming it’s being drafted, will adopt a humbler tone when explaining to investors how Carillion’s “progressive” dividend policy progressed to zero.
Tough lessons of Brexit
“If I were able to give you an investment recommendation it would be to invest in a company that is planing to open international schools in Frankfurt.” So says Sir Howard Davies, former City regulator and now chairman of Royal Bank of Scotland
He isn’t joking. Talk to senior bankers about Brexit and the conversation quickly turns to the practical difficulty in persuading senior employees to move to Frankfurt. Those supposedly footloose types really don’t like the schools.
True believers in the City’s post-Brexit future may view this worry as yet another demonstration of London’s superiority in all matters cultural and linguistic, as well as financial. But, if the biggest concern is education, London needs to look out. As Davies suggests, a shortage of over-priced schools for the offspring of overpaid bankers sounds like a problem the market can fix.