The Public Accounts Committee has called on Whitehall departments to set out details of possible funding alternatives for major projects even when the options are outside government policy, following a review of the funding for the Hinckley Point C nuclear power scheme.
In a report published today, the committee concluded that both the Treasury and the Department for Business, Energy and Industrial Strategy did not sufficiently appraise alternative ways to finance the deal.
Under the controversial funding mechanism for the scheme, the government agreed a strike price with developer EDF Energy that guaranteed the firm a fixed price for energy from the plant (set at £92.50/MWh in 2013 prices) until 2030, if it funded construction.
The committee said that this had locked consumers “into an expensive deal lasting 35 years", as any difference between the strike price and the retail price for energy over the period would be met through higher bills.
The funding plan was intended to ensure that the scheme would generate private finance, but the committee said that BEIS and the Treasury did not sufficiently appraise alternative ways to finance the deal, including possible public sector support, that might have offered better value for consumers.
“The deal for Hinkley Point C is expensive because the government wanted the private NNB Generation Company to bear all the construction risks," said the report. However, it said that "alternative financing models, involving sharing the early project risks between the government and NNBG, could have significantly reduced total project costs”.
The report stated: “The department and the Treasury were adhering to a clear policy position at the time – that the private sector should finance the deal, keeping the project off the government’s balance sheet, and that there should be no public subsidy for new nuclear. The department and the Treasury also wanted to protect taxpayers and bill payers from cost overruns.
“But neither the department nor the Treasury demonstrated to decision makers the benefits and costs of alternative ways of financing the deal that might have resulted in better value for money.”
The committee recommended that in future, departments “should show decision makers the cost and risk implications of different possible financing structures when appraising large infrastructure projects, including its further nuclear deals, even if they are outside the prevailing policy”.
Committee chair Meg Hillier said that the government made some “grave strategic errors” in the scheme, and added the costs of new energy infrastructure to bills could disproportionately impact on the poorest households who are less able to afford price increases.
“Its blinkered determination to agree the Hinkley deal, regardless of changing circumstances, means that for years to come energy consumers will face costs running to many times the original estimate,” she stated.
The report comes after the Institute for Government warned last week that the government was biased against public borrowing for infrastructure and was determined to keep spending "off balance sheet" even where this appears to be poor value.
The think-tank called for changes to the way government accounts, appraises and budgets for infrastructure, including the setting of a target to spend 1% of economic output each year on infrastructure.