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Business Comment

Mark Leftly: Whitehall battle of egos could make our energy strategy blow a fuse

Outlook Forget for a few minutes whether you are extremely pro-new nuclear or utterly against it. Just look as objectively as possible over the negotiations between EDF and the Government on building the first civil nuclear plant since 1995 and the sole conclusion is that politics, not concerns over the environment or energy, will decide whether or not £14bn will be spent at Hinkley Point.

Earlier this month, The Independent on Sunday reported that a strike price, which is the guaranteed minimum that EDF will get for the electricity it generates at Hinkley, had been provisionally agreed at £96-£97 per megawatt hour. That means is that producing electricity from nuclear will be a bit cheaper than from windfarms, which in turn means that the Government can claim it was right to pursue a radioactive path.

The Government, it is understood, has also committed to this strike price being in place for 35 years. EDF wanted a 40-year deal and the Government half that, so the French giant can surely be declared the winner on points, not that a deal that is good for both parties should have a loser.

However, another Sunday newspaper keeps reporting that the Government wants a strike price of 80-odd quid. Our sources are impeccable and our rival rarely makes mistakes.

The one thing we seem to agree on is that finalising a deal is far from definite. EDF has set a rather arbitrary deadline of the end of this month of either agreeing to build Hinkley or pulling out altogether; the Government had hoped to give the go-ahead by Wednesday's Budget, but only managed to confirm planning permission for the power plant this week.

So, who's right?

This reads like a fudge, but both versions, I believe, are correct. Piecing things together, it seems that the environment department and EDF have broadly agreed those terms over the strike price and length of the contract. The problem is that in recent weeks the Treasury has convinced itself that the strike price should be closer to £85. With such an emphasis on the development of shale gas projects in the Budget, and notwithstanding power plant capacity cuts such as SSE unveiled today, it seems that the Treasury believes there are alternatives to nuclear, which weakens EDF's hand.

This has infuriated mandarins in the environment department as much as it has negotiators at EDF. Dropping the strike price by 10-20 per cent means EDF would have to cut the budget of building Hinkley by up to nearly £3bn.

That means there would be a significant risk of cost overruns. Though not entirely clear, it seems that the Government would have to make up any of the costs that are above and beyond the reduced budget.

In the words of one industry source, "that's crazy". Another was alarmed by a sentence in George Osborne's Budget statement that, conceivably, might well be pointing to a crazier idea still: "And the Treasury is now writing guarantees to major projects from supporting the regeneration of the old Battersea Power Station site to building the new power stations of tomorrow."

Treasury officials insist that the "power stations of tomorrow" doesn't necessarily mean nuclear sites. Others insist there have been "nothing more than idle musings" of the state underwriting EDF's debt – but Mr Osborne's thinking is clear, that by dangling the carrot of a state guarantee, the Treasury will get a strike price out of EDF that can be trumpeted as a negotiation victory for the Coalition.

However, the future of Britain's energy supply should not be decided by a soon-to-be-forgotten, completely pointless, petty political win.

Either the UK wants new nuclear at a sensible price or it decides that other energy sources are safer and more affordable.

Next week we could well discover that such a simple choice has not been made, that the future of British electricity has been decided by Whitehall egos rather than logic or principle. And if what should be a fairly straightforward deal falls apart after years of successive governments pledging themselves to a new nuclear age, then potential investors interested in all of those other projects contained in the National Infrastructure Plan will think twice.

Pension funds, for example, will look at the many, many other countries that have pledged to resuscitate their economies through building new roads, railways and tunnels. They will invest in those places rather than deal with a British government that makes a simple shout complicated.

By playing a political game that has so little obvious long-term political benefit, George Osborne and his team at the Treasury could end up undermining their entire growth strategy.