The government and EDF Energy have been locked in negotiations over the future price that will be paid for the electricity produced by the next generation of nuclear power stations and the current standoff means that the whole project is stalled. Today Sir John Armitt has stepped into the debate (as reported in the papers) with a proposal based on the model used to run the Olympic Games.

Now the pure economists amongst you would probably throw their hands in the air and say this should all be down to market economics. If the returns are there the plants should be built. If the returns aren’t there the project won’t go ahead.

But the problem is that the energy market isn’t completely free. Even if you ignore the substantial distortion from subsidies for renewable and micro generation, we interfere in the market. Politicians are extremely sensitive to rises in energy prices and are quick to criticise price rises and “excessive” profits. Also, some sections of the media are always on the band wagon of criticising energy companies if their profits go up, especially if there is a consumer price increase during the period. The result is that energy companies are scared of making too much profit for fear of reprisals from government and the media. But if occasional larger profits aren’t available they will not be able to take higher risks.

People need to remember it is not the absolute level of profit that a company makes that matters, it is the risk adjusted rate.

So John’s Armitt’s suggestion to lower the risk deserves some serious consideration as without a change in either the returns (higher) or risk profile (lower) I don’t think this project will progress.

Mike Bourne

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