Case for nuclear power hit by security fears

His mission: to replace the electricity generated by Britain’s ageing nuclear reactors without breaching the government’s Kyoto commitments on greenhouse gas emissions.

Nuclear power provides around a quarter of Britain’s energy needs, with gas and coal generating 40% and 30% respectively. Renewables, such as wind power, make up a paltry 4%. But over the next 25 years, all bar one of the country’s nuclear reactors will be decommissioned.

The Cabinet-appointed Performance and Innovation Unit (PIU) is drafting its proposals to the government on how to bridge the ‘nuclear hole’.

The nuclear lobby had been confident, with Wilson’s pro-nuclear stance well documented, that the energy review would back a 10bn building programme for a new fleet of nuclear reactors.

But a source close to the unit says the attacks in the US have forced it to rethink its plans. "The 11th September has increased uncertainty in the business community," he said.

"The City isn’t sure if it wants to finance a costly programme to build new nuclear power stations while the threat of further terrorist attacks continues."

When Britain’s fleet of reactors was built, the threat of hijacked airliners being deliberately directed on to reactors was not considered a serious possibility. British Energy and state-run nuclear operator BNFL have since installed extra safety precautions - but far from assuaging public fears, the extra measures have merely heightened anxiety over nuclear safety.

The government could decide that now is not a good time to press ahead plans for the rebuilding programme when fears of further terrorist action are so high.

Nuclear power also represents an economic risk. Last month the PIU issued forecasts predicting that nuclear generation would remain uneconomic unless electricity prices rose or the industry received state help.

But the City - especially in the light of the debacle over the funding of another formerly state-run industry, the railways - may be more reluctant to underwrite the building programme when government policy can be so fickle.

The source added: "The City is also put off by the long lead times between the planning stage and completion of reactors - anything up to 10 years.

"Financiers are acutely aware that this could cut across two governments - and a lot can happen between financing and completion."

British Energy has made its views on energy policy for the next 50 years clear. In its submission to the energy review - titled ‘Replacing nuclear with nuclear’ - it asks the government to "set the framework" on nuclear power, arguing that current market forces cannot make it economic.

It admitted last week, when it announced six-month losses of 17m, that operating nuclear power in the UK could only become profitable with government help.

It argues that since nuclear power does not produce carbon emissions, it should be treated as a renewable source of energy with the government obliging electricity suppliers to take a proportion of their power from nuclear generators. The government is committed to generating 10% of its electricity through renewable sources.

The company’s chairman, Robin Jeffrey, also wants businesses using nuclear power to be exempted from the Climate Change Levy, a tax on industry use of energy, which does not distinguish between carbon polluters and nuclear power.

British Energy also wants the government to take on its 2.8bn liabilities for decommissioning and renegotiate its annual 300m contract with BNFL to reprocess its spent fuel - a contract signed before privatisation, which it says is too expensive.

It insists that it can raise the estimated 10bn needed for the new build through debt and equity. But first the company would have to beat off opposition from state-owned nuclear operator BNFL, through its US nuclear design and services subsidiary Westinghouse, to win any contract.

Analysts say lenders and investors would need assurances from the government that would make nuclear power a profitable business in the UK for either company.

But if nuclear power is not an option, gas has become a less attractive alternative politically. Gas production from the North Sea is declining and will make Britain a net importer. The war in Afghanistan and fears it could lead to a repeat of the 1970s oil crisis have made security of energy supply a more pressing political concern.

Unsurprisingly, this has been denied by gas companies. Recently an executive from BG Group, formerly British Gas, said advisers to Tony Blair had indicated the government was rethinking its stance on nuclear energy.

"They said they were looking at gas again," he said, adding that the security of supply argument was a red herring, as Britain had been importing basic essentials - including energy - for years, and could easily import gas from more stable countries like Norway.

The feeling is that at present the pendulum has swung in favour of renewables. Last week electricity and gas supplier Scottish and Southern put aside 250m to refurbish existing hydroelectric plants in Scotland and 200m to invest on green energy schemes.

This summer, Shell said it would invest up to 1bn worldwide in renewable energy, with a large proportion expected to be invested in Britain.

But the energy review, which had been due for publication before Christmas but is now expected some time in the new year, is the first step in a long process which will eventually end in a green paper and then a white paper.

"There will be a lot of bites at the cherry," the source said. "There has been a shift in attitude on renewables, there is no doubt. There has been a much more positive view on the scale and framework for the building of renewable energy sources, especially from hard-nosed utilities like Scottish and Southern.

"What has changed is that in the last year or so, big players like Shell and BP are now seriously looking at the option of renewables."

He said it was likely the government would probably class nuclear power as a renewable source of energy but might not extend any further subsidies.

"People should see a level playing field created between nuclear and renewables like wind power. Both need millions of pounds of investment. The government will wait and see which one the market backs. In the next five or so years the nuclear lobby and utility companies will be jockeying for investment. The private sector could well have the final say."