The UK-China Civilian Nuclear Agreement

Photo courtesy of Michael Lowell from https://www.flickr.com/photos/pookieevans/849683393/in/photolist-abyFoE-abvK2R-7pSuwy-df7tX6-7T7vtd-e3ghoR-5j74ft-5j7492-5j74mF-7V4Eta-58furn-5E1hm-33bn7z-o2HeXv-9a1bGf-7YgbNu-3gTpf-aDepcL-2i5RgF-rgW7pq-ryoHvF-7CjyDW-
By Jane Nakano, Michelle Melton Oct 23, 2015

This week, Xi Jinping made his first visit to the United Kingdom as the president of the People’s Republic of China. Both governments hope that the visit will inaugurate a “golden era” of trade relations. President Xi’s visit highlights the budding cooperation between the two countries in the area of civilian nuclear energy. Among the roughly £30 billion in deals inked between the two countries was a Chinese commitment to partially fund the first nuclear plant to be built in the United Kingdom since 1995 and the first new nuclear plant in the European Union since the 2011 Fukushima accident. The announcement during Xi’s visit of an agreement to allow substantial Chinese participation in the UK civil nuclear program signifies a new era for China’s nuclear export program and perhaps for the global nuclear industry. It also provides fodder for ongoing debates about the costs and benefits of using nuclear power to address climate change and the national security implications of allowing foreign investment in critical infrastructure. We outline the scope of nuclear cooperation, explain the key factors driving the deal, and discuss the potential implications for the global nuclear industry.

Q1: What is in the agreement?

A1: The Strategic Investment Agreement signed on October 21 between French company Électricité de France (EdF) and China General Nuclear Power Corporation (CGN) in front of Xi Jinping and Prime Minister David Cameron of Britain provides the highest political blessing to the participation by China’s state-owned companies in several planned UK nuclear power plant projects. CGN will invest £6 billion in the construction of the £18 billion Hinkley Point C project in Somerset in return for a slightly more than one-third stake in plant (the European Union estimated the cost at nearly £25 billion, but EdF has said the cost will be £18 billion, adjusted for inflation). The agreement on Hinkley Point was expected, as it follows a 2013 memorandum of understanding between the two countries and the UK government announcement shortly thereafter establishing that Chinese companies would be allowed to take an equity stake in Britain’s nuclear power projects. The fate of the plant, which is being built by EdF, was uncertain until securing this critical financial support from the Chinese. A final investment decision is expected before the end of the year.

The agreement also establishes a broader UK-PRC partnership to develop additional plants. CGN plans to take a two-thirds stake in the potential Bradwell plant and a 20 percent stake in the potential Sizewell plant. In order to move forward with Bradwell, the two companies will form a joint venture to seek regulatory approval for a Chinese-designed Hualong One reactor. Only Hinkley has a target date. Bradwell and Sizewell are still in early phases of discussion; their ultimate fate depends on many uncertain political, financial, energy market, and regulatory factors.

Q2: What is the significance of the agreement?

A2: The commercial agreement is perceived by both governments as a victory. The October 21 document is a commercial agreement with potentially significant impacts on Britain’s power sector and energy system. Engaging the Chinese is seen as necessary to finance the revitalization of the UK nuclear power program, which in turn is seen as essential for UK carbon reduction efforts. The Hinkley Point plant is expected to provide 7 percent of the United Kingdom’s electricity when it is completed in 2025 and is crucial for the country’s decarbonization plans. However, the low-carbon power comes at a significant cost; even with the new financing in place, the UK government may provide £17 billion in loan guarantees and the plant is guaranteed at least double today’s average UK wholesale power price for 35 years. The deal is somewhat contentious among some environmentalists, who are upset that the government is providing such support for nuclear when it has just announced that it is considering cuts in the country’s solar subsidies . Proponents of the deal say that intermittent renewables such as solar and wind cannot replace the lost generation from coal and nuclear that is planned to shut down or will shut down in the coming years—all but one of the United Kingdom’s 16 reactors are slated to shut down by 2023 (when Hinkley Point C was originally slated to come online). Moreover, the British government hopes to see 60 percent of the project value spent in the United Kingdom as well as 25,000 jobs created during the Hinkley Point construction .

The People’s Republic of China also stands to benefit enormously from its budding nuclear relationship with the United Kingdom. It has previously been reported that the financing for Hinkley Point was provided in exchange for an understanding that the Chinese-designed Hualong reactor will be chosen for the planned Bradwell plant in Essex. The agreement validates this speculation. If a Hualong reactor is eventually built at Bradwell, the United Kingdom will be the first Western country to build a Chinese-designed reactor. Success at Bradwell could provide the Chinese with proof that their reactors are capable of meeting stringent regulatory standards, boosting their potential reactor export market beyond the developing world. While the Chinese nuclear industry has had several reactor export agreements, the Hualong reactor has not yet been built to completion anywhere.

While the deal is between the United Kingdom and China, a third country stands to benefit enormously from the deal: France. EdF, which is majority owned by the French government, owns and operates nearly all of the UK nuclear fleet. For EdF, Chinese investment is a lifeline in a challenging time for the company. EdF is in a period of transition, attempting to deal with high levels of debt and adjust to the changes underway in the nuclear industry in France . At Hinkley Point in particular, EdF was having difficulty coming up with the money to cover the 20 percent stake of a British partner that dropped its stake in the project in 2013. EdF has also stated that, while it will retain its majority stake in the plant, it may sell another 15 percent stake in the project.

Q3: What is the impact of this agreement on the global nuclear energy industry?

A3: The agreement is one more example of the continued difficulties of traditional Organization for Economic Cooperation and Development (OECD) civilian nuclear countries in financing and building new nuclear reactors. There has been little appetite or ability among major OECD utilities to finance the enormous costs of building new nuclear plants, despite the desire for zero-carbon generation. Notwithstanding the backing of the French government, EdF was not able to finance Hinkley Point alone. Even with the guaranteed, high wholesale power price and the UK government-backed loan guarantees, the £18 billion Hinkley Point project failed to gain sufficient investor interest until China agreed to raise its stake in the project this week. The UK-PRC cooperation may also intensify debate on the viability of the market approach to nuclear reactor exports in the United States (unlike in France or China, the U.S. government does not own a stake in any civilian nuclear reactor vendors). U.S. reactor vendors, already under pressure from state-backed competitors, may come under additional competitive pressure.

However, the significance of the agreement may also be its potential impact on the future of the reactor industry. The adoption of a Chinese-designed reactor for Bradwell marks the Chinese nuclear industry’s entrance onto the global stage. China is not new to the civilian nuclear industry—the country built its first plant decades ago and currently has 23 reactors in operation and 24 reactors under construction (40 percent of the world’s total). It has also begun exporting its reactors to Pakistan. However, the regulatory and political acceptance of its indigenous reactor design by a major Western economy sends a strong signal that will help build acceptance for Chinese reactors elsewhere and may accelerate the export of its own technology.

Q4: Are there safety and security considerations?

A4: The planned Bradwell plant using the Hualong reactor will undoubtedly stir further discussion on nuclear safety. Any new reactor design must undergo thorough regulatory vetting before being deployed. Until the Hualong reactor undergoes rigorous review by an independent regulatory body, safety questions will remain (as they would with any new reactor design). The UK and PRC nuclear regulatory bodies will likely enter into some form of informal or formal cooperation in order to enable sound regulatory review and approval of the Chinese reactor design. While the United Kingdom has a long history of nuclear regulation, the Chinese nuclear regulatory body is relatively understaffed, opaque, and not independent. Bilateral regulatory cooperation will provide Chinese regulators with valuable opportunities to gain oversight expertise in areas like quality control. The regulatory cooperation will also help ensure the successful construction and safe operation of Bradwell and could bolster safety more broadly, potentially helping ensure the future viability of nuclear energy.

The agreement also breaks an unspoken national security taboo. Balancing the principles of open investment environment against the need to protect national security interests has been a delicate issue for most OECD economies. Foreign investment in critical national security infrastructure has regularly been subject to high levels of scrutiny, especially when the investment originates from a state-owned entity or a country that may pose a security risk. The UK government’s embrace of a significant minority Chinese stake in Hinkley Point and a majority Chinese stake in Bradwell is noteworthy because it signals acceptance of Chinese state-backed investment into a sector with very sensitive commercial and national security implications. There has been some concern among the British public about the decision to allow the Chinese to participate in British critical national security infrastructure. Whether the concern is warranted may not be known for some time; meanwhile, the UK case presents a rare and interesting case study of foreign investment in critical national security infrastructure.

Jane Nakano is a senior fellow, and Michelle Melton a research associate, with the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2015 by the Center for Strategic and International Studies. All rights reserved.

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