Bloomberg News

U.K. Energy Bill Aimed at Boosting Nuclear, Avoiding Gas

May 22, 2012

The British government will today propose an electricity-market overhaul to boost spending on low- carbon power generation and avoid a run on natural gas.

The draft law will guarantee prices for nuclear and renewable energy and pay producers for providing back-up supply when wind power falls short, according to the Department of Energy and Climate Change. It’s aimed at securing commitments from utilities to fund new reactors and clean-power projects, curbing reliance on gas-fed plants.

Power companies are looking to the proposals for long-term industry support after EON AG (EOAN), RWE AG (RWE) and SSE Plc (SSE) withdrew U.K. nuclear plans over the past year and Energy Secretary Chris Huhne quit in February. Utilities need to spend as much as 110 billion pounds ($174 billion) to replace Britain’s aging power plants and upgrade grids by 2020, according to the government.

The price guarantees were first outlined last July, with the government proposing a so-called contract for difference, designed to shield producers from swings in the market and spur investors to build new capacity. The U.K. can get as much as 50 percent of its power by burning gas, which has almost doubled in price in three years, boosting calls for nuclear expansion.

“We have created the most attractive environment for new nuclear of anywhere in the world,” Energy Minister Charles Hendry said last week. “We can’t do this without international investment and we recognize we have to create the right framework to allow that to come forward.”

Nuclear Withdrawal

Germany’s EON and RWE backtracked on plans to build U.K. reactors in March, while SSE said in September it would sell out of a British nuclear venture with GDF Suez SA and Iberdrola SA. (IBE) The country gets about 20 percent of its power from nine atomic plants, five of which are due to shut over the next decade.

Power prices may need to be 166 pounds a megawatt-hour, more than three times the current level, to justify the expense of building a new nuclear plant, Citigroup Inc. said in a May 8 note, assuming an estimated cost of 7 billion pounds a reactor.

That burden may dissuade utilities from committing funds, leading to power blackouts within five years unless Prime Minister David Cameron devises a better nuclear strategy, David King, a former government scientific adviser, said in March.

“The risk of the lights going off is very serious,” said King, who advised Tony Blair and Gordon Brown’s administrations through 2007. “At the moment the industry sees an amber light on nuclear new-build.”

Huhne, Davey

Former Energy Secretary Huhne championed the expansion of nuclear, pushed the development of offshore wind farms and backed subsidies for renewables. He resigned after being charged with lying about a driving offense, leaving the power-market reform to his successor, Ed Davey.

The legislation will go into effect in 2013 if passed. It recommends a so-called capacity market to reward utilities for running back-up plants when renewable power is insufficient, and a nationwide emissions-performance standard.

In separate efforts to drive funding for reactors and wind farms, the Treasury is introducing an emissions tax, starting in 2013 at 4.94 pounds for every metric ton of carbon dioxide and rising to 9.55 pounds the following year. The levy is based on a so-called floor price, set by the government, that increases to 30 pounds a ton by 2020, accounting for the cost of compliance with the European Union’s emissions-trading system.

The U.K. plans to build 18,000 megawatts of offshore wind power and two new reactors by the end of the decade, while replacing current generation and upgrading the grid. About half of its coal-fired plants are scheduled to close by 2016.

Electricite de France SA, the largest nuclear operator, is planning two new generators at its Sizewell site on England’s North Sea coast with partner Centrica Plc. (CNA) It also intends to make a final investment decision on two new reactors at the Hinkley Point project in southwest England by the end of 2012.

The units would be the first new nuclear plants in the U.K. for more than 15 years.

To contact the reporters on this story: Kari Lundgren in London at klundgren2@bloomberg.net; Catherine Airlie in London at cairlie@bloomberg.net.

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net.


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