The triple whammy for nuclear power: Centrica, Cumbria, clean-up costs

Centrica pulling out of a vital new plant and blows on the cost and location of radioactive waste have darkened the industry's prospects, says Tom Bawden
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Britain's nuclear power conundrum has become considerably more complex after Centrica pulled out of a crucial new plant at Hinkley Point yesterday in the face of spiralling costs and severe delays.

Coming hard on the heels of new problems over the cost and location of disposing of radioactive waste, Centrica's exit from the Hinkley Point consortium is the nuclear industry's third blow in less than a week.

The first punch was landed last week when Cumbria, the only area to have shown any interest in hosting an underground radioactive waste storage centre, decided to reject the idea. This was followed by a second jab from a new Public Accounts Committee report showing the cost of cleaning up the Sellafield nuclear waste site has reached £67.5bn with no sign of when it will stop rising.

The triple blow underlines the nuclear-sized scale of the task facing the government as it plans to avert power cuts and reduce carbon emissions by building a new generation of fission-fuelled power plants, the first since 1995. The Hinkley Point C nuclear power plant in Somerset was due to be the first of the new breed, with the French state energy company, Edf, financing 80 per cent of the project and British Gas-owner, Centrica, the remaining fifth. France's Areva will provide the European Pressurised Reactor that the proposed plant will use.

Sam Laidlaw, Centrica's chief executive, said: "Since our initial investment, the anticipated project costs in new nuclear have increased and the construction timetable has extended by a number of years... participation is not right for Centrica and our shareholders."

"It's all looking a bit difficult in the UK nuclear power industry," Mike Lawn, of Bloomberg New Energy Finance, said.

"Taken collectively, these developments represent a blow, with the nuclear new-build being the most concerning bit." Angelos Anastasiou, an analyst at Seymour Pierce, said.

"We really need new nuclear power if we want to keep the lights on in this country, not in this decade but in the next to replace the existing plants as they close down," he added.

Centrica's decision not to invest in Hinkley Point in Somerset – and two plants at Sizewell in Suffolk, further down the road – also means none of the proposed new nuclear power plants involves any British companies. Moreover, there are growing fears that Hinkley Point might not happen at all, or if it does, only at a very high cost.

"The big question is, will Edf go through with its British nuclear plans? I think it probably will happen but that it's a bad idea because of the risk that the cost overruns and delays we have seen in every other EPR project will be repeated," Mr Lawn said.

The cost of Hinkley Point, which Edf put at £9bn in December 2010, is reported to be £14bn as increased safety requirements after the Fukushima disaster in Japan exacerbated the traditional cost overruns associated with nuclear power plants. And, if the French experience is anything to go by, they could go up more. The costs of the plant that Edf and Areva are building using the same EPR design in France have more than quadrupled from €2bn (£1.7bn) in 2003 to €8.5bn. Even with Centrica's involvement, Edf's participation in Hinkley Point has been hanging in the balance for months with the French company locked in talks with the government to determine a guaranteed price for the electricity it generates.

Edf appeared yesterday to be aware of its power as it put further pressure on the government to agree a favourable "subsidy" for the project, known as a contract-for-difference.

"This contract-for difference is now more than ever the key to attracting investors and to unlock the funding for this project," Edf said.

Edf is well known to want a partner to share the costs of Hinkley Point and is in talks with the state-owned Chinese group China Guangdong Nuclear Power. However, there is no guarantee the Chinese will agree to take Centrica's place. Edf declined to comment yesterday on whether it could proceed without a partner, amid suggestions it would baulk at the prospect of funding the entire project.

But while Centrica's departure has added to the questions over the future of Hinkley Point and Britain's nuclear power project, analysts point out that Hitachi's decision in October to buy Britain's Horizon Nuclear Power, a joint venture to build reactors on existing sites on the Isle of Anglesey and Oldbury-on-Severn, is a huge vote of confidence in the industry.

Centrica announced a £200m writedown for its share of Hinkley Point's costs so far and a £500m share buyback to return some of the money it would have spent on the project.

Finance director Nick Luff said it would be "unfair" to blame the government for its decision, pointing out that the time and cost overruns were not its fault. The government added: "The decision reflects the company's investment priorities and is not a reflection of UK government policy."

However, critics say the government has failed to provide an attractive framework for potential investors across the low-carbon energy market, including wind and solar power, and must bear some responsibility for Centrica's departure. That said, the government does have an unenviable task, as it seeks to balance growing demand for energy with the need to reduce emissions – and all while keeping a lid on prices.