Hinkley. Should we say no?

Last year, the Conservatve government under PM Cameron and Chancellor Osborne, announced a series of economic initiatives with China which was said to have started a "golden era" between the two countries. But new PM May's government, surprised everyone recently when they put on hold final approval for a new nuclear power station at Hinkley Point, in South-West England, so they could review it. The new French-built power station, was set to receive some US8bn in Chinese investment for the project.

It has been said that PM May is reviewing it principally because of  security concerns with China's role in the project. That this is the reason, is based on a blog post from her chief of staff and comments from former government (but Liberal-Democrat) Vince Cable. In any case such fears are probably overblown given that security checks are rigorous, that China's role is purely on the money side and that any attempt of China to compromise our national security would damage China's reputation and ability to work on infrastructure investments in the West again.

In any case, there are far more important reasons to cancel this project. John Maynard Keynes, the greatest economist of the 20th century, is purported to have said, "that when the facts change, I change my mind. What do you do sir?" Well the facts have changed since the original decision to back the project was made in 2010.  As the Economist magazine reported on August 6th the project now looks "extraordinarily bad value for money". The UK has promised to pay some £92.50 per megawatt hour for Hinkley's output compared with wholesale prices of some £40 today, and perhaps lower in 2025 when it due to open. Furthermore we have promised to pay this for 35 years! Yet the government has reduced the forecast cost of producing electricity from various renewables in 2025 by a third for onshore wind and by nearly two-thirds for solar power - both well below the £92. They will only come down further after 2025. Renewables are the future, and big new nuclear power stations  like Hinkley (which would fulfil some 7% of our needs) have no real future and certainly with such price guarantees. In the short-run we will need more electricity, but these should be from gas-powered plants, that can be built quickly, run cheaply and turned on and off quickly to offset fluctuations in renewable supply.

What of the relationship with China?  Well the Chinese are clearly not happy. And it is not great timing, when we have a Brexit to implement, when we are emphasising trade deals and being open to the rest of the world and when our economic relationship was already lagging Germany and France's relationship with the Middle Kingdom. However, it should be made clear that the decision to not go ahead with Hinkley is purely a financial one. There may be a short-term impact on the relationship but I am confident it can flourish. There is a lot more than nuclear power out there. However, there is a final point. At this time of a possible economic downturn and virtually 0% gilt yields, there is no reason why the UK cannot fund far more infrastructural projects itself!