26 May 2016
Week in Brief: BUSINESS AND THE CITY
BLOWS THE WIND FOR FRANCE? After many months, years indeed, of negotiations at all levels, the outlook for building the proposed Hinkley Point nuclear power station is still confused. Readers may recall that the power station, to be built and operated by EDF, the French state controlled power company, has long being controversial in the UK, and not universally popular in either the Conservative Party or in the Treasury. The controversy is primarily around two areas, firstly whether large power stations such as this are the correct way to source nuclear power – or whether it would be more efficient, cheaper, quicker, and perhaps safer to build a series of much smaller local power stations around the UK; and secondly, the nature of the 30 year income guarantees given to EDF by the British government to make the power plant economically viable. These costs will be passed onto UK consumers by surcharges on bills, which will mean consumers, even those opposed to nuclear power on principle, will be paying for what is forecast to be the most expensive electricity in the world. Makers of small nuclear plants, such as Rolls Royce who make them for nuclear powered submarines, say they could build power stations at significantly lower output costs, and get them on line earlier. EDF, which has not finally decided to proceed and needs French government assent to do so, are saying that the earliest any power will come out of Hinkley will be 2025. When the deal was first mooted (in 2007) EDF promised that it would be on-line in 2017. At the moment EDF is still proceeding as if the plant will be built and is in consulation with its French unions, who have said already that they want the project delayed in case the cost bankrupts EDF. That is by no means fanciful; EDF is already stretched financially without the risks of the £19bn Hinkley project, not least because of delays and cost overruns, and safety concerns, at Flamanville in Normandy, a new power station of similar type to Hinkley. Concerns about EDF’s capacity to handle the Somerset project are shared by Segolene Royal, the French energy minister, who is worried about France’s energy security – EDF supplies around 70% of France’s electricity. EDF’s credit rating has recently been downgraded which makes financing its debt more expensive, and the share price (of the free float, which is small) has halved in a year, so raising money is going to be difficult. The French economy minister, Emmanuel Macron, who has not apparently had the same briefing as Ms Royal, says the French government is determined it will be built and “will not be pulling the plug”. Whether electricity plug or bath plug, he did not elucidate.
BLOWS THE WIND NORTH? If nuclear is not to be the answer, maybe wind could be. Some of the friendship showed by David Cameron and George Osborne to the Chinese government seems to be paying off. Or, at least, that is the case north of the border. A consortium of SDIC Power Holdings, a Chinese specialist investor in power based investment schemes, SSE, a British power investor, and Copenhagen Infrastructure Partners, a Danish fund manager, has agreed to finance an offshore wind farm in the Moray Firth, that hostile area of sea with Inverness at its apex. The scheme, known as Beatrice, will have 84 turbines and cost £2.6bn. Whilst the climate there may be hostile to building, it should be very good for power generation. Investors in such schemes are always keen to maximise generating efficiency and, given the forecast 25 year plus life of the scheme, a little extra construction difficulty will be well worthwhile if generated output is high on the efficiency scale. Beneficiaries of the investment will include the town of Wick, which will be both the construction base and maintenance centre for the farm when built, and also the city of Hull, where Siemens will make the turbine blades at their new facility. Also benefitting: the Crown Estate in Scotland who own the seabed – the farm will be built about eight miles out but within the UK’s territorial limits. The scheme should be functioning by 2019 and should supply power sufficient for 450,000 homes.
FULLY COMPREHENSIVE: As the technology required to let us loll in the passenger seats of our motor cars whilst they drive themselves advances fast, with trial fleets on the road in California, the insurance industry has been pondering how it might insure a driverless vehicle. The manufacturers say that they will be safer than cars driven by humans, with constant attention and no tendency to doze off or text from the wheel. If that is so, then the insurance premiums if you sit in the back and don’t interfere should be less than if you insist on taking the controls. The Queen’s Speech last week said that driverless cars must have essentially the same cover as driven vehicles. The insurance industry has welcomed this news (why would they not, indeed) and confirms that at first sight premiums should fall. However, they also point out that as driverless vehicles will be significantly more expensive than conventional cars, the premium saving may not be nearly as great as the expected reduction in accidents might suggest. Also, they say, they will have to bear in mind that if an automated auto crashes and is found to be at fault, that will be a fault of the manufacturer, which might imply a manufacturing or design error and all sorts of class actions. Then, how do the insurers determine whose fault it all is? – that implies expensive in-car monitoring to see if the back seat driver might have reached over to lend automation a hand. They had better get on with their thinking – Volvo have applied for consent to test driverless cars on British roads next year.
SMELL OF MONEY: The government is getting into some strange investments. The latest is a joint venture with Thames Water, the highly regulated public company which supplies all London’s mains water and sewage services. Thames is busy replacing much of the aging cast iron pipework which carries water into London homes and businesses, but it is also having to replace the sewage systems which take the waste products away. The current system is founded on a well engineered tunnel and pumping system, brilliantly designed by Sir Joseph Bazelgette, the main sewer of which lies under the Embankment roadway and is built on land reclaimed from the River Thames. It has coped for over a hundred years but is now at capacity, so that spills into the river are becoming too regular an occurrence.
Thames has taken the bold step of designing a huge new main – over 7m diameter – to be built under the river and connected via high capacity pumps and processing to the existing feed system. But the financial cost is too great for Thames, so it and the government have agreed to form a new company – Bazalgette Tunnel Ltd – of which Thames will fund a quarter, via a surcharge on its customers. The remainder will be paid for by an infrastructure partnership of institutions providing equity and long-term debt and partly by a bond issue of about £700m. The issue is underwritten by the government to get a good rating on the bonds, which will keep finance costs as low as possible. Both the funding method and the technology have come in for criticism, the funding because of private gain on what is essentially a core public service, the project for being grossly over-engineered at a time when technology has moved on so fast that minor tweaks to the present system and a greener approach to disposal could make it obsolete. But it seems it is coming anyway – the financial structure is agreed and work has begun at key sites.
KEY MARKET INDICES:
(as at 24th May 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.62% (steady); 5 year 0.94% (rising).
Euro€: 1 mth -0.29% (steady); 3 mth -0.26% (steady); 5 year -0.12% (rising)
US$: 1 mth 0.57% (rising); 3 mth 0.62% (rising); 5 year 1.31% (rising)
Currency Exchanges:
£/Euro: 1.30, £ strengthening
£/$: 1.45, £ steady
Euro/$: 1.12, € steady
Gold, oz: $1,252, slight fall
Aluminium, tonne: $1,525, steady
Copper, tonne: $4,570, falling
Oil, Brent Crude barrel: $48.20, steady
Wheat, tonne: £107, rising
London Stock Exchange: FTSE 100: 6,136 (small fall). FTSE Allshare: 3,382 (slight rise)
Briefly: This truly is a classic May, with volumes subdued and very limited movements. Even oil has had a very steady week. The “Remain” campaign has had some favourable opinion polls and that seemed to support a slight improvement in sterling as against euro. US interest rates continue an overall upward movement.
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