Blair presses nuclear button, but will the market stump up the cash?

The Government yesterday ruled out subsidies for nuclear power or market mechanisms such as a "nuclear obligation" requiring suppliers to buy a set proportion of their needs from nuclear stations, raising doubts as to how a new generation of reactors might be built.

The nuclear lobby claims that a streamlined and shortened planning and licensing regime is all that is needed to make a new construction programme viable. But City experts believe it will require government guarantees before any private investors will put money into the nuclear industry once again.

As recently as the 2003 energy White Paper, the Government said that "the current economics of nuclear power make it an unattractive option for new generating capacity".

That was after British Energy, the country's biggest generator of nuclear power, was saved from collapse only after a £5bn bale-out from the Government which left it as the m ajority shareholder in the company.

But yesterday's long-awaited Energy Review turned that assessment of three years ago on its head declaring that "new nuclear stations would make a significant contribution to meeting our energy policy goals".

The review did not spell out how many new nuclear stations might be needed, but officials indicated that at at least six new 1,000-megawatt stations would be required to prevent Britain becoming excessively dependent on imported natural gas.

The review says: "It will be for the private sector to initiate, fund, construct and operate new nuclear plants, and to cover the full cost of decommissioning and their full share of long-term waste management costs."

Vincent de Rivaz, the chief executive of the state-owned French energy company EDF Energy and the man said to have been instrumental in persuading Tony Blair to sanction a new nuclear programme, responded positively to the review, saying: "We are a step nearer the possibility of investing in nuclear with today's announcement."

However, in the absence of some mechanism to prevent investors losing all or most of their money, as British Energy did when the company went bust four years ago, City experts are sceptical of how much interest there will be from the financial markets.

One senior investment banker closely involved in the energy sector said: "It will require some form of subsidy or nuclear obligation or long-term contract arrangement to convince private investors. Without one of those three, I would be amazed if any bank would be prepared to finance a new nuclear station. You would find it difficult to get a gas station built, let alone a new nuclear reactor."

Aside from speeding up the planning and licensing process, the Government's approach to new nuclear appears to be to leave it to market forces. The review calculates it will cost £38 a megawatt hour to produce electricity from a new nuclear station. That compares with British Energy's current operating costs of £23 a megawatt hour and current forward wholesale electricity prices of £50 an hour.

Assuming the price of gas stays at around 37p a therm (which equates to oil at $40 a barrel), nuclear build costs are £38 a megawatt hour, and fossil-fuelled generators have to pay at least €10 (£6.90) for every tonne of carbon they produce, then, say DTI officials, new nuclear will be cheaper than a gas-fired station and considerably cheaper than an offshore wind farm. If the price of carbon crept up to €36 a tonne, then each 1,000-megawatt nuclear station would generate a saving of £1bn over its lifetime. If the price of gas rose to 60p a therm (equivalent to $70 a barrel of oil), each nuclear station would generate a net gain of £2.8bn.

However, it will be for the capital markets to decide whether it is worth putting up the investment on this basis when there is no guarantee what will happen to future wholesale electricity prices or carbon costs. Unlike gas or coal or renewables, nuclear power is baseload and has to run constantly. British Energy went bust after wholesale prices collapsed and the cost of producing electricity from its eight nuclear stations was greater than the price it could sell for.

At present, the carbon price is around €15 a tonne. At that level, the net benefit of building a 1,000-megawatt nuclear reactor would be more like £200m - which is a very small margin to earn over a 40-year lifespan given the inherent risks and huge uncertainties surrounding a new nuclear programme.

Adrian Ham, an independent consultant, says: "Blair says that 'the time is now' to make decisions about our energy future. But they've left it to the market, which means there's nothing new. It [the Review] is a lot of fluff. We need more government action. Left to itself, the market is far from taking the right course in terms of the energy mix, either from a carbon or strategic point of view."

Jim Watson, an energy expert at the University of Sussex, points out that Britain can hardly continue to lecture the rest of Europe about liberalising their markets if, at the same time, it is proposing intervention here on behalf of nuclear. He added: "We are in danger of repeating history. At the end of the 1980s, Margaret Thatcher - widely thought to be a 'strong' Prime Minister - ordered a new generation of 10 new nuclear power stations. In the end, she got just one - Sizewell B. We fear that this may be about to happen again."

Despite EDF being the most likely developer of new nuclear power stations in this country, Mr de Rivaz failed to get one thing he wanted - government intervention to provide a minimum price for carbon. Europe's Emissions Trading System (ETS), for buying and selling carbon credits, does not even extend beyond 2012 - a relatively close horizon given how long it takes to build any sort of power generation plant.

Nevertheless, EDF remains optimistic: "The Government is committed to there being a continuing carbon price signal which investors take into account when making decisions ... The EU Emissions Trading Scheme (ETS) is here to stay beyond 2012 and will remain the key mechanism for providing this signal. We will keep open the option of further measures to reinforce the operation of the EU ETS in the UK should this be necessary to provide greater certainty to investors," the Energy Review states.

The most bullish proponent of new nuclear stations is Areva, the state-owned French reactor company which is building the privately financed Olkiluoto plant in Finland - the first "third-generation" reactor in the world.

Charles Hufnagel, a spokesman for Areva, insisted yesterday the company was ready to build plant here. He said in Finland the project has received no subsidy, the client is a private sector one and the electricity market in the country is "totally free". He added: "Nuclear players do not need any subsidy to put in place nuclear that is market-friendly."

Olkiluoto and an EDF Energy plant just starting construction in Normandy, Flamanville 3, are the only examples of European nuclear build using third generation reactors. Each of these is costing about £2.1bn to build. Of course, the more that are built using this European Pressurised Reactor design, the lower the costs. The Finnish plant should start production at the end of 2009 while the EDF facility is scheduled to begin commercial operations in 2012.

Given the nature of nuclear power, the up-front investment is a much higher proportion of the total costs, as fuel is much cheaper during operation than gas or coal. It should take around 10 years to put in place a working nuclear power station, given a smooth planning and licensing process.