Critical time for UK government and industry

15 May 2012

One week before the UK government tables its energy market reforms some key aspects of the package are still being decided. Its success will be vital to plans for nuclear new build, including the sale of Horizon Nuclear Power.

All these matters were discussed by MPs at a session of the Energy and Climate Change Committee today. They heard evidence from the energy minister Charles Hendry as well as the chiefs of the Horizon Nuclear Power joint venture, Volker Beckers of RWE and Tony Cocker of EOn.

The executives said it "would be very speculative" to isolate any of the factors that prompted them to pull out of the Horizon development and put it up for sale. They said their decision was based on three things: the current low price of gas in Germany and continental Europe, the margins on power production across Europe and the financial impact of Germany's reaction to the Fukushima accident.

Cocker said that EOn remains committed to new nuclear build in Finland (through its leading status within Fennovoima) because that investment decision had already been made before the above factors came to the fore. Both men praised the work of UK ministers and officials to make investment viable in new nuclear as well as other low carbon options.

Central to this is the upcoming electricity market reform bill, due to be put before parliament on 22 May. This will explain in detail the plan to establish a 'contract for difference' (CfD) system that will give investors certainty on the price they will obtain for electricity generated.

Contract for difference

This new support mechanism is based around a 'strike price' for electricity for the duration of a contract between the generator and the counterparty, said today to be the National Grid.

If market prices are below the strike price, the counterparty will make up the difference, thereby assuring predictable revenues to investors in financially risky new generation projects. However, when market prices are above the strike price it is the generator that must pay back.

Hendry said today that different strike prices would be set for each low-carbon power source, and this should be compatible with European Commission rules. He expects that "nuclear should be the lowest cost low-carbon technology, large scale."

The government's original plan had been to sign the CfD contracts with generators, thereby lending its sovereign 'AAA' credit rating to the arrangement and boosting its ability to help investors raise finance. However, it has emerged that the government's direct involvement may not be acceptable under the European Commission's state aid rules.

Instead, said Hendry, the National Grid company is to be the signatory, splitting its operations: One part will continue as the grid operator; the other will administer the 'settlement process' and determine the 'strike price' for the CfD. Money paid out or collected from utilities will be handled by National Grid and factored into the billing process.

This move away from government-backed CfDs is less attractive to investors said Beckers: "We are not in the position of counting on a AAA contract and any deterioration from that point inevitably has an impact [on the cost of finance]."

Cocker said it was important to "ensure that [CfD is] as immune as possible from future political and regulatory interference." Hendry told the MPs that government would be legally liable for lost CfD payments, not National Grid, if any future government decides to change the CfD.

Hendry said the government is still formulating the package of legislation it will present next week. This will have to be fully compliant with EC requirements.

"Significant interest"

Horizon's project to build up to 3600 MWe of new nuclear capacity at Wylfa would have amounted to around £10-12 billion ($16-19 billion), said Beckers, and taken 8-10 years to complete. Nevertheless, all three men giving evidence today agreed that the new build opportunity at Wylfa represents one of the best in the nuclear market, while the UK also has one of the best regulatory and legislative frameworks.

Hendry said there was "a window of a few months" for "serious interest" to be shown in Horizon by international buyers, and some "significant interest" had already been seen. No firms were named, but Hendry pointed out that some potential buyers may have recent proven experience in building nuclear plants and this means the Wylfa project "could happen on the same timescale or faster" than originally planned.

All Horizon's potential buyers are from outside the UK but Hendry was unperturbed by MPs' questioning on this, which they noted as a major issue of interest to the public. He pointed out that no UK companies want to take the lead in nuclear build, but "any potential investors need to meet all our safety and security requirements and show a benefit to the UK generally." Interested parties will be treated in the same way as those who are currently involved in UK nuclear: "As long as we can be satisfied by any partner on the safety and security issues then we don't rule them out, no matter where they come from."

Beckers and Crocker are working with Hendry to give interested buyers access to the information they need from government. The companies have now agreed on the final information memorandum and are soon to make official presentations to interested parties.

Researched and written
by World Nuclear News