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UK 'shot itself in foot' over nuclear electricity support - analyst

16 May 2012 17:01:42 | edem

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The UK is struggling to entice companies to take part in its nuclear new-build programme because state aid rules are stopping the government from bearing financial risk under its chosen support model for low-carbon power generation, an analyst believes.

The chosen support model - long-term feed-in tariffs with contracts for difference (FiT CfDs) - is also off-putting for vertically integrated utilities because market price exposure is removed, a top analyst told ICIS on Wednesday.

"The UK shot itself in the foot with fixed FiT for nuclear," as opposed to using a premium FiT that includes market price exposure, utilities analyst Lakis Athanasiou commented. "It took away any strategic incentive for any of the vertically integrated multi-utilities to partake in new nuclear."

Under its wide-ranging market reform programme, the UK department of energy and climate change (DECC) will oversee the setting of a strike price for low-carbon power generation, which will differ according to technology type (see EDEM 2 May 2012).

If wholesale power prices fall below the set level, nuclear operators will be paid the difference by a contractual counterparty, whereas should wholesale prices rise above the strike price, the operator will have to refund the difference.

But on Tuesday, it emerged that there was some confusion over which body would be contractual counterparty, with EU state aid rules likely to prevent the government from playing the role.

Liability

Under a barrage of questions from the UK parliamentary energy and climate change committee, energy minister Charles Hendry conceded on Tuesday only that "although we haven't signed the initial agreement, the government is liable for any future change in policy."

This means that any liability borne by the government of the day would only emerge if the FiT CfD regime were fundamentally overhauled at the policy level, which the ruling Conservative-Liberal Democrat coalition government has pledged not to do, but could happen in the future under subsequent governments.

Hendry said that no decision had been reached as to which body would act as legal counterparty for the FiT CfD regime, adding that state aid rules would likely prevent the government from doing so, and that "discussions with the [European] Commission are now happening."

Transmission system operator National Grid has been charged with the setting of the strike price but, like the government, will not act as counterparty, Hendry confirmed.

It has been widely accepted that high levels of financial risk involved in new nuclear projects must be hugely diluted before companies will be enticed into the sector.

The situation was exacerbated when German utilities RWE and E.ON pulled out of the UK's new nuclear programme at the end of March (see EDEM 29 March 2012).

"The only way for the UK to proceed with new nuclear under the fixed FiT is for government to totally de-risk projects, in effect acting as de facto project developer," Athanasiou said. But this is a position that the government is unable to assume.

The government is to lay its draft energy bill, which will include further details regarding the FiT CfD structure, before parliament on 22 May. The counterparty debate will continue from that point, Hendry said. JS

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