Policy misgivings muddy nuclear’s future

David Cameron is to make a keynote speech on Thursday at Lancaster House, telling an august group of 23 international energy ministers that the coalition is committed to a “green” future in which Britain no longer relies on fossil fuels.

But the prime minister’s vision will be undermined by Centrica’s warning on Saturday that it could pull out of its joint venture to build nuclear plants in the UK.

“If this were to happen it would be extremely serious,” said one senior coalition MP. “It would make things very difficult for us.”

Nuclear power is an integral part of the government’s low-carbon agenda and its aim to cut carbon dioxide emissions by 80 per cent by 2050.

Without it, the government might also struggle to keep Britain’s lights on. All but one of the country’s existing nuclear power plants are due to be shut down by 2023, while new EU carbon restrictions will force nearly a third of the coal generation fleet to close by the end of 2015.

Yet last year’s Fukushima disaster in Japan has prompted a fundamental rethink of nuclear power, which has had consequences for the UK. Last month RWE and Eon scrapped plans to build two reactors in the UK, in part due to financial difficulties caused by Germany’s post-Fukushima retreat from atomic energy.

There are growing calls for the UK to follow Germany. Greenpeace – the environmental group which campaigns against nuclear power – called on the government to “urgently deliver a Plan B” involving more renewable energy. “Despite successive governments bending over backwards to make the business case stack up, the nuclear dream is failing,” said John Sauven, its executive director.

A problem investors face in the UK is a liberalised electricity market. Elsewhere, governments underwrite the costs and risks associated with new nuclear power. Here, energy companies planning to build reactors receive no direct public subsidy.

The government has tried to help with a big market shake-up. To be set out in the Queen’s Speech next month, these include the idea of long-term contracts to guarantee a steady rate of return during the lifetime of a new nuclear or renewables project – so-called “contracts for difference”. But to date there is no agreement on actual levels of support.

For Centrica, the higher the electricity price it is able to set in these contracts, the better. But discussions with the government about an acceptable price have been inconclusive. “Nuclear power in this country depends on the financials agreed between the supplier and the buyer, and that’s something that’s far from agreed,” said one person close to Centrica. “It must be resolved this year.”

If government sets the price too high, it might face a consumer backlash. And the economics of nuclear have deteriorated. Safety measures and reactor design changes proposed since Fukushima mean more uncertainty about construction costs. Flamanville, EDF’s existing nuclear project in France, has faced cost overruns and delays.

Overhanging all these factors is uncertainty about direction of policy. “It’s hard to determine what the outcome of the electricity market reform will be – and there are doubts about the political conviction underpinning it,” says an industry consultant. “All that [deters] investment.”