Energy Fact and Opinion: Uncertainty over Chinese nuclear investment in post-Brexit U.K.
September 6, 2016
- In late July, British Prime Minister Theresa May announced that the British government needed more time before approving the October 2015 agreement between her predecessor and the Chinese government for the China General Nuclear Power Corporation (CGN) to invest in a series of nuclear projects in the United Kingdom.
- The original deal entailed CGN acquiring a one-third stake in the construction of the Hinkley Point C project in Somerset, acquiring a one-fifth stake in the nuclear plant in Sizewell, and acquiring a two-third stake and building Chinese designed reactors in Bradwell.
- The government announcement came just hours after the board of Électricité de France (EdF), France’s state-controlled utility, which owns and operates Britain’s 15 nuclear reactors and is a partner with CGN for Hinkley Point C, voted to approve the project. The Hinkley Point C is slated to become the first nuclear plant to be built in Britain in two decades, and to house two reactors built by Areva, another French state-controlled company.
- The May Cabinet, inaugurated within a month following the June 23 public referendum favoring the British departure from the European Union, indicated that it would not reach a final decision before September.
The announcement by the cabinet of Theresa May did not specify the reasons for its decision to hold up the construction approval, but only stated that it would “consider carefully all the component parts of this project.” On the economic front, the British government decision to guarantee the price for Hinkley Point C electricity has been controversial. The cabinet of Prime Minister David Cameron, predecessor to Theresa May, saw the Hinkley Point C project as essential to Britain’s ability to achieve its emissions reduction goal as well as update its power generation infrastructure. Also, according to EdF, the construction and operation would yield economic benefits including the creation of 25,000 jobs and over 60 percent of construction value for British companies. However, the guaranteed electricity price of £92.50 per megawatt hour for 35 years—more than double the current wholesale electricity price in Britain—has been criticized for the potential burden on taxpayers.
What triggered the May cabinet’s scrutiny the most, however, seems to concern national security implications that may arise from allowing the investment by a state-owned Chinese nuclear company in the British nuclear power fleet. Insofar as the British government and EdF could not finance the £18 billion project on their own, the Chinese investment was a critical component of the deal. However, the May cabinet appears to be worried that China may be able to incapacitate “Britain’s energy production” capability by building in weaknesses into computer systems if CGN were allowed to build Chinese designed reactors at Bradwell.
The dilemma between the desire to update a nation’s aging electricity infrastructure and the need to ensure the national security is not unique to Britain, however. While the British government mulls over the national security viability of the CGN investment in the British nuclear power fleet, the Australian government blocked state-owned State Grid of China from acquiring a majority stake in the electricity distribution business in the state of New South Wales (NSW) on national security grounds. A potential for Chinese intelligence services to exploit State Grid ownership of the NSW grid system appears to be among the chief concerns. Comparison can sometimes be misleading as each country has a unique set of economic conditions, political circumstances and societal dynamics let alone the difference between nuclear power generation and electricity distribution businesses. However, the British and Australian cases are noteworthy as they illuminate a growing challenge for a country to balance its economic and national security needs at a time when the scale and zest of investment from a country which does not seem to share the same norms and principles adhered to by the western democracies surpass those from other countries.
Meanwhile, the additional scrutiny drawn by the investment interest by its state-owned enterprises is not likely to help facilitate China to privatize its state-owned enterprises as the success stories seem to outnumber contentious ones. For example, about 70 percent of Chinese investment in European companies and assets in 2015 came through China’s state-owned-enterprises. As for the aforementioned State Grid, which is the largest utility in the world, the company already owns substantial shares in the privatized part of Australia’s power distribution business as well as electricity network shares in Brazil, Italy and Portugal.
The British dilemma comes with a particular sense of challenge, however. If the United Kingdom pursues the path in accordance to the June referendum outcome (so-called “Brexit”), Britain needs strong ties with an economy outside the European Union (EU) more than ever before. Thus, an action that can sabotage the current or future inbound investment from a non-EU economy would warrant careful deliberation. Such a British predicament has not been a secret even if it were not so unsubtly underscored by the Chinese Ambassador to Britain following the May cabinet announcement on the Hinkley approval delay. Chinese investments in Britain already include controlling stakes in the British companies in a variety of sectors, including automobile, energy, property, technology, and retail.
The commentary by the Chinese ambassador may also reflect Chinese annoyance over the prospect of losing China’s economic foothold in the EU in the form of the United Kingdom. Yet, Brexit is unlikely to pose a long-term problem to China. Beijing is more likely than not to begin cultivating close ties with another member of the EU in search for a new foothold while Britain will likely be left with more limited latitude regarding the national origin, corporate nature (state-owned or otherwise) or target sector (critical infrastructure or otherwise) in securing inbound investments post-Brexit.