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EDF subsidy to put UK on nuclear path

Government close to signing 35-year deal that will protect French group from falling energy prices

The Government is understood to have agreed a 35-year subsidy to French energy group EDF to build the first in a new wave of nuclear power stations.

Although there are still risks that talks could break down – EDF even warned in a recent internal memo that the deal was not guaranteed to go through – this is one of a series of advancements in the nuclear programme.

On 19 March, the day before the Budget, the Environment Secretary, Ed Davey, will grant planning permission for EDF's power plant in Hinkley Point, Somerset, paving the way for the first nuclear power station to be built in Britain since 1995.

However, Sizewell B will be the last nuclear station in operation by the end of 2023 and the Government is determined to meet the energy gap that will emerge through new nuclear. The deal with EDF is considered vital to reassure the other overseas companies still involved, such as Japan's Hitachi, that it is worth them investing billions in these projects.

It is understood that EDF and Government negotiators have compromised on how long a subsidy – a term that neither party believes is accurate but is generally accepted in wider industry – could be guaranteed. Known as "the strike price", this is the minimum that EDF would be paid for any electricity generated, meaning that should the market price fall below that level the Government would make up the difference.

EDF and other nuclear developers need those guarantees because otherwise they could risk losing billions and would not go ahead with investment. Industry sources said that the strike price being discussed is around £96-£97 per megawatt hour, towards the bottom end of the anticipated £95-£99.50 range.

However, in exchange for receiving a relatively low price, EDF demanded the guarantee be in place for 40 years. This was double the initial proposal and has been a sticking point delaying the deal.

Hamish Lal, a partner specialising in nuclear at lawyer Jones Day, said: "EDF has played a clever, strategically commercial set of negotiations, but this will ultimately benefit the UK, UK Plc, and Hitachi."

Hitachi spent £700m last year on the rights to build reactors near existing plants in Gloucestershire and Anglesey in what was a rare piece of good news as German groups RWE and E.On decided against constructing those stations.

It is thought an announcement will not be ready for the Budget, but EDF is determined that talks will finish by the end of the month.