Jeremy Warner's Outlook: Investors still wary of nuclear 'bonanza'</B>

Bank of England refuses to cut rates; ... and still S&N won't talk to Carlsberg
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The Independent Online

Governments the world over, from China to Finland and even Ireland, are getting the nuclear bug. Britain yesterday formally joined the rush with a 192-page white paper which gives carte blanche to the industry to build as many new nuclear power plants as it likes.

The Government's last stab at the problem was described by a High Court judge as "misleading" and "seriously flawed" after a legal challenge by Greenpeace, so ministers will be hoping that this time around they've managed to make a proper job of it.

Even so, the Government's apparent go-ahead for a new generation of nuclear power stations continues to beg more questions than it answers.

High energy costs, worries about energy security and the need to cut carbon emissions to deal with climate change are providing the backdrop for something of a renaissance in the nuclear power industry, which has essentially been becalmed ever since the Chernobyl disaster more than 20 years ago.

Now it is coming back with a vengeance, with massive programmes of new nuclear build in China and India as well as an upsurge of renewed interest across the developed world as the climate change debate gathers pace. Britain's need is arguably more urgent than most. Around 20 per cent of our electricity needs already come from nuclear stations, the great bulk of which are due to be decommissioned over the next ten years. To expect renewables to fill the resulting "energy gap" is a big ask. The only other form of emission-free, or near emission-free, power generation is nuclear. And in any case, even if more fossil-fuelled power was still an acceptable alternative from an environmental point of view, nobody wants to make themselves beholden to the Russians by importing yet more gas.

Only one problem. Unlike almost everyone else in the world, the British Government expects our new generation of nukes to be wholly privately financed. Once upon a time, such an idea would have looked so fanciful as to be barely worth considering. Britain's own history of nuclear build, with extreme cost over-runs and continued operational failings, gives no encouragement to the view that nuclear can successfully be privately financed. Yet now that some sort of price is being put on emissions and the cost of oil and gas have gone through the roof, the proposition looks more viable than it did. Improvements in technology and design have made the costs of building nuclear power stations more predictable than they were. The resulting plants are also infinitely more efficient. According to exponents of the industry, all these factors combined have made nuclear cost competitive with other forms of power generation, and perhaps even given it a slight edge.

Even so, it's hard to see how the City might be persuaded to finance the huge upfront costs of such a programme without a greater degree of government support than presently proposed. A long term solution to waste disposal has yet to be found.

Even if the Government could bring itself to select a definite site for a deep repository, laying waste to its electoral support in the immediate area in the process, no adequate explanation of how it would be financed has yet been articulated.

As long as the price of carbon remains a market-driven variable, investors will be reluctant to join the present enthusiasm for new nuclear build. Some go so far as to insist that they wouldn't invest at all in the absence of a "nuclear obligation", similar in nature to the existing "renewables obligation", which would force suppliers to source a set proportion of their generating needs from nuclear. Despite the present excitement, there's a mountain to climb yet before Britain's first new reactors in a generation start to roll off the production line.

Bank of England refuses to cut rates

Despite all the bleating from the high street over the last week, the Bank of England's Monetary Policy Committee (MPC) plainly doesn't think the UK economy is about to collapse into recession. If it did, it would have cut interest rates yesterday. Almost certainly there would have been a sizeable contingent on the MPC demanding a cut, but they were outnumbered. The majority chose to wait and see how events pan out.

As I have argued, I can't personally see the point of this, as it seems equally certain the Bank of England is going to cut rates next month anyway.

Even so, there is a reasonable case for the Bank to stay its hand. It is not at all certain where the economy is heading and it is in some respects quite right for the Governor, Mervyn King, to argue that he shouldn't be panicked into over-reacting.

All the same, the UK economy has plainly entered highly dangerous waters. Three of the biggest constituents of Britain's recent history of economic growth – the boom in the consumer economy, the housing market and the financial services industry – have all been removed, and a fourth, rapidly growing public expenditure, is also scheduled to go into reverse. In the absence of these supports, it is hard to see where salvation might lie. The picture is by no means universal, but my soundings of business leaders suggest that the slowdown in the consumer economy is now quite definitely moving into the corporate world. The credit crunch has caused the cost of capital to rise quite markedly, putting profit margins under some pressure and prompting a general, hunkering down mentality.

All over the shop, costs, budgets and investment plans are being examined with a critical eye. Once that kind of psychology takes hold, a business downturn becomes a self-feeding phenomenon. The Bank of England missed an opportunity to nip this process in the bud yesterday. We can only hope it is not leaving things too late.

... and still S&N won't talk to Carlsberg

It's high risk, but may be worth the gamble. Earlier this week, I wrote that anything more than 780p a share and John Dunsmore, the chief executive at Scottish & Newcastle, would struggle to take his shareholders with him in further resisting Carlsberg's embrace. Carlsberg has now obliged by raising its mooted offer from the previously proffered 750p a share to the suggested 780p. Mr Dunsmore says that only 800p would persuade him to open the books. Does Carlsberg want S&N's Russian assets badly enough to pay the extra 20p, or is its chief executive, Joergen Buhl Rasmussen, serious in threatening to walk. The gap is now just 20p a share, or little more than 2.5 per cent, and plainly Carlsberg is very keen indeed to secure its prey. If it fails, it is then into months of tortuous litigation over ownership of the Russian assets, with a quite high risk of an adverse outcome that would be deeply damaging to the com-pany's longer-term growth prospects.

On the other hand, Carlsberg's partner in bidding for S&N, Heineken, may not be so keen to go any further, particularly in the light of the recent sharp deterioration in the mature, European beer market, while Carlsberg itself is already pushing at the upper limits of what it can afford to finance. Remember, it is actually a smaller company than S&N. Mr Dunsmore is determined not to blink first, but behind the poker face there will be a seething mass of anxieties.

Whenever there is a bid of uncertain outcome, a very substantial proportion of the share register immediately gets traded into the hands of hedge funds whose only interest is in a fast buck. The long-term perspective that needs to be taken to think that S&N shares will eventually trade at a price significantly above 780p is simply not in their DNA. Obviously, Mr Dunsmore wouldn't recklessly put the interests of shareholders at risk, but which particular group of investors is he thinking of in holding out for 800p a share and are they in the majority?

As I say, quite a gamble as Carlsberg takes its case directly to the City.

j.warner@independent.co.uk

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