So these guys are building us a nuclear power station.

I’ve scanned through the comments and one thing that keeps being stated is that EDF are the contractor, which they are not.
EDF is the ‘supplier’ of the facility and will manage it.
Having been involved in a number of tenders over the past 3 years for Hinkley I can inform you that the facility will be constructed in the majority by UK Civil and Mechanical Engineering Companies.
Yes a few are in joint ventures with foreign ‘experts’, but it’s UK companies who will be the ‘Contractors’.

I can inform you that the facility will be constructed in the majority by UK Civil and Mechanical Engineering Companies.

The chief government negotiator for Hinkley Point C Ed Davey has been more precise, he claims that 57% of the contract value will go to UK firms. That’s a helluva lot of work and money to foreign companies in what will be a British power station supplying British consumers. But this represents a fantastic deal for Britain ?

Since you asked “so” nicely (??), I will clarify the point JY for you. But first to correct your mis-representations lets be clear about my first points:

1. Is it wrong for someone to make profits from a LT capital investment project (it isn’t IMO). This developed into a profits v profitability question – see below.
2. The issue of foreign involvment and linked to that whether we are subsidising the French (the security question is another matter)
3. The slap in the face for the UK.

I addressed (3) right in my OP. But for clarity: experts estimate that we have the capability in the UK to meet 40-60% of the project. So given the (perceived) need for urgent action to address the UK energy mix, this was always going to involve some sort of foreign involvement and EDF have a world class reputation (despite current over-runs etc). Centrica were involved in the discussions but I understand that they pulled out – presumably because they couldn’t make the numbers work – leaving us with no UK direct involvement. Although as 100mpplus states, a substantial UK involvement does exist in stages of the project. So hardly a slap in the face for the UK – more a reflection of where we are. Correct me if I am wrong 100mphplus, but that is my understanding.

That partly addresses (2) and highlights why the anti-French and Chines arguments are either red-herrings at best or xenophobia at worst.

So the rest of (2) and (1). Ok lets start with some definitions so that we are talking the same thing:

Profit = revenue – cost
Profit margin = profit/revenue
Profit margin (in reports in this case) = the “margin” added to household bills that is profit. Currently estimated to be @5% for UK energy companies (see recent Treasury report)
Profitability = profit/capital employed
As an identity therefore, Profitability = profit margin (profits/revenue) x asset/CE turnover (revenue/CE)

Then we have a long term investment project that is essentially a NPV calculation ie discount future cash flows from the project at an appropriate cost of capital and/or compare profitability (return on capital) against cost of capital.

[The free-market is an irrelevance here as nuclear power will never/rarely be built under free market conditions – although some US commentators argue against this. However, most accept that nulcear development requires not only political support but also direct financial support from governments. This is clearly the case here. ]

So we have a high risk, long term capital project with up-front costs and delayed revenues coupled with lots of funnies (decommissioning, changing sentiments, poor track records in delivery, accident risk etc). In other words a project that is likely to have a relatively high cost of capital. Some reports put this at 12-15% (but that seems lowish to me).

Irrespective of who is involved (private, public, joint) this is a project that is assessed on whether the return exceeds the cost of capital. (there is an assumption here, but bear with me since all the government reports start at this point).

Phew= back to the point. Profits per se are interesting but not the key factor. Why?

Assume that £100 is invested at a cost of capital of 12%. If EDF makes a profit of £10, is that a good or bad thing for them and for us? From what you are saying, I assume that you think this is a bad thing as profits (£10) are leaving the Uk and crossing the channel. I disagree. If EDF makes a profit of £10, their profitability and return on the £100 invested in 10%. Their cost 12%. So their return is -2%. Whose happy here? They get a negative return on the investment [and we get the benefit]. Merci mes amis et tant pis!

So there we have it – you can make a profit (revenue > cost) on an investment but still “lose out” if the profitability is below the cost of the capital employed – the basic investment maths bit. Now of course, estimates on both the cost of capital and the returns are subject to a great deal of variation, hence my first comment that it is absurd to draw conclusions re who is the winner and loser at this stage. And this is a gross simplification of the calculations her. And then there is an issue of whether this a good idea at all………? 😉

But to really complicate matters, ask why the French themselves conclude that EDF has an unviable business model that tries to combine LT investment needs with energy prices held artificially low by the state. Ring a bell?

and highlights why the anti-French and Chines arguments are either red-herrings at best or xenophobia at worst.

And still you persist with your offensive and quite frankly pathetic claim that anyone who opposes the Chinese government owning vital parts of our energy infrastructure must be some sort of bigot. And you accuse me of being rude 🙄

The Chinese have no expertise to offer Britain. If UK governments can spend £billions on bale outs for the banks, and £billions in Afghanistan fighting an enemy they now want to negotiate with, then they can find the money to invest in Britain’s energy infrastructure.

They choose not to do so because they do not want, for purely ideological reasons, the British government to own power stations.

It has nothing to do with economics.

In exactly the same that they don’t want a British state owned company to have the franchise for the East Coast Mainline, but they are happy for a French state owned company to have it.

Most people find this unacceptable, it does not make them xenophobes.

highlights why the anti-French and Chines arguments are either red-herrings at best or xenophobia at worst.

As ernie notes it not and its daft to keep claiming xenophobic – you are not to keen on Europe or the Euro I could throw this lame accusation at you equally spuriously.

No matter how many times you throw your mud its still a red herring and a non sequitor.

Assume that £100 is invested at a cost of capital* of 12%. If EDF makes a profit of £10, is that a good or bad thing for them and for us? From what you are saying, I assume that you think this is a bad thing as profits (£10) are leaving the Uk and crossing the channel. I disagree. If EDF makes a profit of £10, their profitability and return on the £100 invested in 10%. Their cost 12%. So their return is -2%. Whose happy here? They get a negative return on the investment [and we get the benefit].

I dont know what you mean by “cost of capital”* of 12 % but as far as i can see they have made a 10% profit that you are calling a 2% loss because it is less than they expected. It less profit, not no profit, it is not a loss as its 10 % more than they have spent.

I am not “STW” here I really dont get that at all.

* Wiki
The cost of capital is the rate of return that capital could be expected to earn in an alternative investment of equivalent risk.

so they have made less profit than they could elsewhere but not actually “lost” out as such on the actual contract. I say that is profit personally just not as much as you want.

You are correct that you still do not get cost of capital.

Like any investment, this requires major debt and equity capital. Both have a cost involved. For the project to make investment sense and to be viable over its life, the return has to exceed the cost.

This has nothing to do with less profit or what they expect. in fact that is 100% wrong (that is not meant to sound rude btw). But if you believe that this, “is profit personally just not as much as you want”, then stay clear of the investment world. You will get burnt. But as a starting point do not ignore the WIKI bit just before your quote. It’s quite important, as is the opening line.

If we do not have the domestic capacity to complete this project and the UK companies don’t want to participate in a consortium for whatever reason, then it is pretty pointless to carp on about foreigners getting the work. At best, it is a red herring…..as I said. Otherwise…and I’m sure that cap doesn’t fit anyone here.

You are correct that you still do not get cost of capital.

Is this deliberate or do you just not realise when you do it?
Was the rest meant to make me understand or patronise me to within an inch of my life?
I learnt that apparently I should stay away from investments as I would get burnt turning my £100 into £110. I am still unclear as to WHY or what this “cost” is.
Teachings your jobs innit.
I am sure we can all see why.

the return has to exceed the cost

What is the cost of the investment then if not the £100 invested?
Again a serious question borne of confusion and the unending optimism you may explain instead of mocking.

If we do not have the domestic capacity to complete this project and the UK companies don’t want to participate in a consortium for whatever reason

Really. And you talk about “red herrings”.

It’s almost as good as this one :

But to really complicate matters, ask why the French themselves conclude that EDF has an unviable business model that tries to combine LT investment needs with energy prices held artificially low by the state. Ring a bell?

In the style that you would use………either disingenuous at best, or blatantly misleading at worse.

Well I have explained it once, you still got it wrong and I said that you didn’t still didn’t understand it – the bit you quoted. Not more I can do, if you think that is insulting then so be it. It wasnt meant to be. But yes I am so crap at teaching it that my son gets it first time. Go figure.

Just read the WIKI thing – its not great but it says the same thing. And if you want to continue to confuse profits and profitability again so be it. I tried to help. Given the last post you will excuse me if I decline to answer why £100 is not the cost of investment. But it isn’t. I am sure the answer will be found (like most things?) on wiki.

Good try Ernie, I see your humour and my post on the other thread was wasted. So all that remains is Bon Nuit.

You are Michael Gove and I claim my death by patronisation

I see nothing in your answer that explains why the cost of spending £100 is not £100. I just see statements that tell me it is not BUT you have NOT told me WHY.

The cost of capital is the rate of return that capital could be expected to earn in an alternative investment of equivalent risk.

so the cost is that they could invest it elsewhere and make money elsewhere?
I am not really sure this is a cost in any real sense [ it would be a factor in any investment decision for obvious reasons [they are, generally,only in it for the money]. I am not sure this is a real cost though but I doubt we will agree on that.
I dont see how expecting 12% and getting 10% is a 2 % loss- your estimate was wrong that is all [ inserts lame joke about economists and predictions]. You cannot lose what you never had.

I am not trying to STW this at all I dont get your point – you can insult me or you can try and explain it again – its your choice.

I’ll have a stab at answering the cost of capital thing – it’s basically like a loan. Imagine the cash reserves of a EDF are operated as a bank. When a project like this comes along, the EDF bank “lends” money to enable the project to be delivered, and in this case does that over 10+ years before getting any returns.

The cost / return on the loan for the EDF bank is based on:

– inflation – lending £100 now and getting £100 back in 10 years time effectively represents a significant loss as £100 won’t buy the same amount in ten years time. This is a time value of money factor.
– the return the EDF Bank could achieve by investing the money in something else.

So in the case of the EDF Bank, the cost of capital represents an internal “interest rate” on the money that will be set aside for the project. If that interest rate is below the amount EDF could make on another investment and does not at least track inflation, they may still make a profit i.e. getting £110 back on their £100 investment but the loss compared to the other loan / investment is also taken into account – with inflation / time value of money they would need a return of at least £120 just to break even.

teamhurtmore – Member
Given the last post you will excuse me if I decline to answer why £100 is not the cost of investment..

Nothing in the cold light of day makes me change this point and I will refrain from commenting on, “I am not really sure this is a cost in any real sense.” To correct that would simply be patronising after all. But since I am by your reckoning a crap teacher, I will do what all crap teachers do and leave the angry boy to himself at the back. Better for all concerned.

Rob thank you
That made perfect sense and I now understand what we have been discussing and why there is a cost above what the investment actually is – I get the reason.
Many Thanks

THM All good teacher blame the “angry boy” when they have failed to understand. Its deffo best practice!

Just to add some info, I see an interesting page from fullfact.org that examines the profitability of electricity companies in the UK.

fullfact.org

and highlights why the anti-French and Chines arguments are either red-herrings at best or xenophobia at worst.

Just to take a step back…

The primary role of a country’s government is to protect its economy and its people.

The first problem regarding nuclear power in the UK is down to successive Tory, Labour, and now Tory governments not planning far enough ahead about major infrastructure decisions, or supporting a sufficiently skilled private industry to carry them out. This point, I grudgingly accept, can’t really be pinned on Cameron.

The second problem then comes. If there isn’t a suitable UK company to build a new fleet of nuclear power stations, then who do we get to do it?

Here, the answer should be obvious: the government uses its own capital to resurrect something akin to the CEGB, and we do the work ourselves, contracting in foreign companies where required. This not only maintains UK control over our energy infrastructure (isn’t this the main reason we’re trying to step away from gas?), but also avoids the rather sensitive security matter of foreign powers having detailed knowledge of key parts of our energy infrastructure. I don’t think that anyone can argue that these two points are not good outcomes of a new plant being British made.

Choosing not to go down this path means that the current government is derelict in its primary role (to protect its economy and its people).

It’s not xenophobic to say this. The UK should be investing this sort of money in its own economy, not the French and Chinese economies. As has already been said, they can certainly find the money to bail out banks and invade people when they want to. I believe they’ve also found 50bn to build a railway that’s a little quicker than the existing one. This, I assume, won’t be much use without the electricity needed to power it.

So, why are we not going down the “made in Britain” route? Well, as far as I can tell, it’s a flawed idealistic reason. To me, that doesn’t really justify the millstone being placed around our necks.

Zokes, may I point you in th direction of the government’s report on these issues published March this year. Far from the ideological stuff that is alluded to here, it actually contains many of the arguments that you make and the explains why the current strategy may not extend as far as you may like.

But when the facts are examined, the story becomes very different – funny that. We have a government that recgonises where and how a “market-based” system for nuclear power has failed (early in the report and a rel long term story) There are clear strategies including the rationale for why the government needs to get involved, how to ensure UK inc and people are involved (with target),, the cost-benefit anaylsis explaining why UK involvement should be maximised as much as possible and the reasons why this does to reach the 100% that would allow us to fly the “made in UK flag”.

It’s an intersting report led by my mate Uncle Vince. Once you read the facts, it is easy to see when ranting especially about ideology etc is just that – ranting and far divorced for the actual events in front of us.

There may well be flaws in the strategy but that is a long way from the kind of false accusations banded about earlier.

One technical point, the government doesn’t have it’s own capital or money. It raises it from us and by borrowing – hence the need to understand the investment bit!!!

None of the above should be taken as me saying that I support the proposal per se. But if we are going to reject it, let’s at least do it for the correct reasons.

Zokes, may I point you in th direction of the government’s report on these issues published March this year.

Once you read the facts, it is easy to see when ranting especially about ideology etc is just that – ranting and far divorced for the actual events in front of us.

Do you really think that Zokes is going read “the government’s report on these issues published March this year” because you claim it refutes his post ?

Of course not, you know damn well that he won’t. So why even suggest it then, it seems such a silly thing to do ?

I’ll answer that question for you.

What you are in fact saying is, “you are wrong Zokes but I’m not going to tell you why, you’re just going to have to trust me because I know lots of things that you don’t know”. It’s an absolute classic teamhurtmore tactic.

Just tell Zokes why he’s wrong, don’t come out with some bollox about reading a government report published in March.

The truth is that you can’t tell him why he’s wrong. So instead of doing so you simply want to insinuate that he is.

Oh stop ranting/trolling.The whole point is that the government (and I) agrees with lots of what Zokes says. That was my point. Not what you misrepresent as per. Clear trolling. They also go on to explain why it’s not in their (and their advisors) opinion possible to deliver nuclear power 100% from UK inc. My second point – you did read my firsf para above? We all recognise that this is a laudable goal but not achievable in their opinion especially given the perceived urgency to deliver a different energy mix. With an accelerate investment in UK capability they expect that we have the domestic capability with government support to deliver 60% of achieveables. And they include the cost benefit analysis to show why.

So perhaps it’s YOU who should stop being silly. Read the report yourself (it woild take you about an hour) and avoid the embarrassment or ranting about stuff that is simply not true. Far from being an ideological driven response there has been considerable time and effort given to trying to work out a coherent nuclear strategy in the UK. In this case, I will give Vince Cable the credit he and his colleagues deserve.

Yes classic THM tactic – try to see what the government is actually saying as opposed to mere unsupported ranting. Try it some time.

Ditto re energy policy. The government has done huge amounts of work on how to make the energy markets work better. There a many recommendations based on thorough analysis presented by the cross party committee. So when Milliband and Major ignore this in favour of sound bite politics it should be highlighted.

Any way enough. I am out. It’s Friday night after all and your trolling is tiresome in the extreme. I had hoped that we/you could move on. Obviously not. I have no desire to bore others or annoy the mods.

You sound stressed, not something which I would expect from someone confident and secure in what they believe.

BTW I read an interesting article today about the growing opposition to the TINA mantra in economics, specially in the wake the catastrophic global systemic failure of the neoliberal free-market experiment when all that “basic investment maths” screwed up.

They quoted Paul Krugman, you know, the geezer with a PhD in economics from MIT and winner of the Noble Prize in Economic Sciences, as saying :

“As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth”

Makes you wonder, eh ?

“UK Inc” and its more popular sibling “UK Plc” are terrible and meaningless cliches.

Ernie was correct, I have no intention of reading that report. I’ve told you quite clearly my opinion as to why what is being done is not only a very bad idea, but possibly even constitutes dereliction of duty by the ruling coalition. The facts I’ve used to come to this conclusion, I feel, are supported by common knowledge and insight. They seem to echo what other posters have stated.

So, THM, you tell me why I’m wrong. Or, accept that you are.

Try explaining, rather than ranting, and you may find others more open to your viewpoint. This is, after all, the point of a discussion. Not only to get your point across, but to also listen to alternative views, and perhaps take them on board somewhat.

Well that’s a pity. The government lays out the background to your first paragraph – the history bit. No conflict with what you are saying. It then lays out the strategy v 2030-2050 benchmarks. A large part of this focuses on maximising the share of UK companies (large and SMEs) not only in the domestic market but also in the current and future export market. There is no dereliction of duty since they have outlined exactly what they intend to do about it, when and against which benchmarks they expect to be judged and how they are going to do it. Then the potentially interesting and most relevant bit, it lays out the role of government (critical), an assessment of current UK capabilities and expectations re how proposed investment can maximise the contribution of UK industry across the value chain. This is (perhaps) the contentious bit (although not really) since it explains why the UK, even after the proposed investment, will not have the capacity to deliver 100% of the needs. Gov may be able to do amazing things but magic isn’t one of them.

None of this is ranting, none of this constitutes a dereliction of duty etc. Its is where we are now and what the gov intends to do about it. So people have a choice, rant about facts that sound nice for the sake of arguing but are not true or focus on the facts as they stand. There is then the legitimate basis for criticisng specifc details on what the gov proposes. It is clear where some want to stand because they like trolling. You can make your own choice.

Bottom line is the gov broadly supports your sentiments but can only partially deliver against them. Hardly a dereliction of duty nor some ideological drive allowing foreigners to take over our industry. Shame that because the headline don’t make for such great reading. Tant pis!

Gov may be able to do amazing things but magic isn’t one of them.

Well up until now when it comes to building nuclear power stations British governments have apparently been waving their magic wands and making magic.

“For the first time, a nuclear station in this country will not have been built with money from the British taxpayer”

– Secretary of State for Energy Edward Davey.

So there you have it, this government proudly boasts that for the first time since 1956 a power nuclear power station won’t be built and owned by British taxpayers, but by companies under the control of foreign taxpayers.

BTW Re : “A large part of this focuses on maximising the share of UK companies” You do realise that that EDF Energy which is leading the consortium to build Hinkley C is a UK company, even though it is 100% owned by its French parent company and that France is the direction in which much of the profits will be going, mostly into the coffers of the French government, don’t you ? Of course you do.

So it shows how misleading the claim that 57% of the contract value will go to UK firms, a figure which we are apparently expected to be hugely impressed with. The largest “UK firm” involved in this project is Électricité de France.

Oh look, THM is confusing his personal opinions with facts and being incredibly haughty and patronising towards anyone who disagrees.

That is a massive surprise. 🙄

Sorry Grum, but I didn’t write the governments report. But nice try!

FWIW, I am (on balance) anti this project and the end result but for different reasons. But when I read the report and the background analysis especially from the Oxford team on the cost of not investing in our own domestic capabilities. I understood and changed my mind on the governmet’s motivation and reasoning, And for a change I am actually quite sympathetic to Vince Cable’s arguments.

If you want to believe that the issue is pure ideology and dogmatism, so be it. Like most political decisions when you strip away the rhetoric there is a heavy dose of pragmtism involved combined and very detailed supporting analysis, combined with a dashing of opportunism close to election time. Like energy prices this gets lost in the Westminster noise.

And look at what the poster who works in the industry said!

P.S. I am also sympathic to the idea (shared by the Government) that not only would it be great if we had the domestic capability to deliver these projects domestically but also that we should also have the global expertise to export those skills internationally in the way EDF does. So it’s genuinely intersting to understand why the Government feels that they cannot fully deliver on this a present.

FWIW, I am (on balance) anti this project and the end result but for different reasons. But when I read the report and the background analysis especially from the Oxford team on the cost of not investing in our own domestic capabilities. I understood and changed my mind on the governmet’s motivation and reasoning, And for a change I am actually quite sympathetic to Vince Cable’s arguments.

It’s typical that when in possession of a weak argument you waffle in a confusing manner and heavily hint that you are in fact in agreement with the opposing point of view after all.

So what is it ……. are you (on balance) anti this project and the end result but for different reasons ? Or do you understand the governmet’s motivation and reasoning ? Which one is it ?

And obviously your opposition, if you are actually opposed – we haven’t yet established that, is “for different reasons” to everyone else, no surprise there. But how come you’re so secretive about these “different reasons”, don’t you want to share them ?

I look forward to much prevarication and beating about the bush.