Chris Huhne's plans for energy prices and generation have been welcomed by the industry

Published on Saturday 22 May 2010 14:18

AS DAVID Cameron settled into Downing Street and prepared to announce his first ministerial team, energy industry leaders were on tenterhooks over who would get the vital job of ensuring the country's lights would stay on.

A number of senior figures, including power generation boss Rupert Soames, had repeatedly warned the previous government of a looming gap in Britain's energy supplies due to its ageing and fragile power stations.

With patience running out, they have been ready to remind the new administration that decisions need to be taken to ensure there is a continuity of supply. They were also calling for a mix of power sources: renewables, thermal and nuclear.

When the prime minister finally unveiled his new front bench, it was the Liberal Democrat Chris Huhne who got the job of energy secretary. It could have spelt disaster as Huhne is a long-time opponent of nuclear.

But he quickly adopted a more conciliatory approach, paving the way for the construction of a new generation of nuclear power plants across the UK.

It was a welcome shift of policy, though Huhne and his Liberal Democrat colleagues had secured a vital concession: that no public money will be used to finance nuclear stations. Huhne – who described the coalition agreement on nuclear as one of many "unpleasant" compromises in the new partnership – may feel the lack of government cash is a major deterrent.

Speaking on BBC Radio Four he said no new nuclear power station had been built without public support "for a very long time", adding: "If it turns out that – for the first time in decades – a consortium is prepared to build a nuclear power station without public subsidy, then… that will, in all probability, go ahead."

Industry leaders are being more sanguine, despite the estimated 40 billion-plus price tag attached to the replacement of the UK's ageing fleet of 19 reactors operating across ten sites. Mish Tullar of Centrica says what the government has set out is "all positive" in terms of what the nuclear industry requires to move forward.

"Clearly new nuclear power stations are not cheap things to build, but equally you don't have to come up with all of that in a single lump sum," he says. "It doesn't necessarily require public subsidy. What it does require is a fair wind in terms of the planning consents, and a fair reward structure for clean production."

To that end, two points in last week's coalition agreement have been particularly welcomed. The first is a promise to provide a floor price on carbon allowances that generators must buy to cover their emissions.

In effect, this will provide additional help for all low-carbon projects – including nuclear – which can sell their excess allowances to higher polluters. The price of these allowances has been volatile in the past, most notably in 2007, when their worth fell to zero.

The second significant change is a plan announced by the Conservatives before the election to speed up the planning process and stop protestors from delaying construction. The new system would give parliament direct powers to approve new stations.

Industry experts say both of these elements are crucial in helping to bring down costs. "Clearly we have got to get into the details – what will the floor price be? How quick will the new planning process go? – but what the government has signposted so far is encouraging," Tullar says.

The company, which trades as Scottish Gas and British Gas, produces and supplies energy from a variety of sources. Among its assets is a 20 per cent stake in British Energy.

EDF is at the forefront of a clutch of firms preparing to invest tens of billions in new UK nuclear stations. It is due to take a final decision on whether to build a plant at Hinkley Point in Somerset by the end of next year. It would be the first new reactor in Britain for more than 20 years.

Vincent de Rivaz, chief executive of the UK arm of EDF, describes Huhne as "a man we can do business with". He says he welcomes the fact that the new government has committed to a parliamentary vote on the National Policy Statement setting out the need for new nuclear plants.

Though the coalition deal allows the Liberal Democrats to abstain, the vote seems most likely to be in favour. The Conservatives can expect to be joined by a large number of MPs from Labour, whose former government supported new nuclear build.

"As an investor in long-term assets, we are pleased that there is broad public and political support for new nuclear power as part of the mix," de Rivaz says. "We look forward to working with the new administration and other interested parties to make new nuclear a reality."

There is also a pledge for the construction of an offshore electricity grid that would be a huge boon to sea-based renewable energy projects using wind and wave power. It will, however, be an extremely expensive undertaking, and it's not clear who will foot the bill.

The breadth of such an undertaking was illustrated on Thursday, when National Grid shocked investors with news that it would be tapping them for 3.2bn, the largest cash call in the history of the British utilities sector. Most of those funds will go towards upgrading its ageing gas and electricity transmission network in the UK, a five-year project expected to cost 22bn. That, however, doesn't take account of any extensive offshore network that National Grid or one of its rivals might be asked to provide.

Regulator Ofgem has estimated the cost of connecting 33 gigawatts of offshore turbines to the grid at 15bn. On that basis, it would take about 31bn to link up the 68GW of potential generation capacity that the Offshore Valuation Group believes could be operating in Scottish seas by 2050.

Despite such financial hurdles, proponents of renewables point out that there is much to be gained. The Offshore Valuation report, published last week by the Public Interest Research Centre, claims that wind, wave and tidal power could generate an amount of electricity equivalent to a billion barrels of oil per year, and eventually create 145,000 new jobs.

While the UK government seems to have staked the future of energy supply on a combination of renewables and nuclear, the situation in Scotland remains unchanged. The SNP-led Scottish government remains committed to letting nuclear – which currently accounts for about one third of the country's generating capacity – fade from the energy mix.

As a result, there are no plans to replace either Torness in East Lothian or Hunterston B in Ayrshire, which are due for decommissioning in 2016 and 2023 respectively.

"Nobody at the moment is actually proposing to build in Scotland," says one nuclear industry source on the condition of anonymity. "We are not trying to take on the Scottish Government on this issue."

However, he adds that Scots will have the "luxury" of waiting to see how such projects pan out elsewhere in the UK. With currently generous amounts of capacity and a high number of other low-carbon sources, Scotland may get the chance to learn from the experience of others. "The question will come back again for Scotland, but there is not the same sense of urgency as there is in England," he says.

David Lonsdale, assistant director of CBI Scotland, disagrees. His organisation has long campaigned for the construction of new nuclear plants.

"I don't think sitting and waiting is an attractive or promising option," Lonsdale says. "The best way is to plan ahead and prepare for the future."