••• BY KELVIN ROSS •••
Where does the decision by German utilities RWE and E.ON to pull out of the Horizon nuclear power project leave the UK’s atomic energy programme?
In tatters? Not quite, but it is a wake-up call to the government to finalise the future of its energy market.
UK energy minister Charles Hendry said the decision was not made because of “any doubts about the role of nuclear in UK’s energy future”. Perhaps not, but it certainly was a reflection on the UK’s ability to offer clarity and certainty to potential investors in nuclear power generation.
Since it came to power, the coalition government has talked of establishing both clarity and certainty. Yet the introduction of its Energy Bill and Electricity Market Reform (EMR) has, so far, done just the opposite.
The absence of details about a carbon price floor, long-term contracts for difference, an emissions performance standard and a capacity mechanism have left energy companies jittery about future investments.
This was highlighted by RWE’s chief executive Volker Beckers. Just two days before RWE’s decision to quit Horizon was made public, he told a conference that “every part of the UK sector seems to be up for reform” and added that the British power system was suffering from “layer upon layer” of regulation.
“The British approach is regulation with a veneer of competition,” he said. “If the Energy Bill is deemed unworkable then the investment potential in the UK will be diminished. There will be better places to invest – that is the simple truth.”
Just 48 hours later, that ‘simple truth’ was apparent for all.
At the same conference, Peter Kiss, sector leader for global power and utilities at consultants KPMG, told PEi that in the UK, the EMR was proving too much of a grey area. “If a country has decided to go for nuclear, the big question is what will be the underlying market mechanism prior to a company making a final financial commitment. It is very important to put the rules on the table: otherwise the private money is just not coming.”
Well, it is certainly not now coming from Germany as far as nuclear is concerned.
Where does this leave the UK? “Even more reliant on imported, carbon-intensive gas,” according to Alistair Smith, chairman of the Institution of Mechanical Engineers’ Power Division, a point of view seemingly backed up by the government.
In the days prior to the RWE-E.ON decision, UK energy secretary Ed Davey said: “Gas will continue to play a vital role in a low-carbon economy. Modern gas fired power stations are relatively quick to build and twice as clean as many of the coal plants they are replacing.”
And on the same day, chancellor George Osborne added: “The government is providing certainty to businesses that want to invest in gas. Gas is a reliable, affordable source or energy. We need to recognise that gas will be a vital part of the mix in delivering affordable and secure low-carbon energy.”
What is sure is that the UK faces a financing crisis in its energy sector. E.ON’s chief executive Johannes Teyssen said the decision “is not at all a rejection of nuclear energy, but rather a decision about how we make investments”.
Which is exactly the point. Whether it be nuclear, renewables, or carbon capture and storage, the UK is keeping would-be investors at arm’s length because it will not reveal details of its market mechanism.
Hendry thinks new backers will step into the hole left by RWE and E.ON. They may well do, but who will they be? With RWE and E.ON the UK was doing business with two of the trusted companies that are part of the country’s ‘Big Six’ energy providers. Of the remaining four, two are committed to renewable-focused paths: SSE and Iberdrola-owned Scottish Power. That leaves Centrica (British Gas) and EDF, who together plan to build two reactors at Sizewell and another two at Hinkley Point.
Following the RWE-E.ON decision, EDF’s chief executive Henri Proglio said that these plans were still on track. But ratings agency Moody’s has said that if the Centrica-EDF partnership does go ahead with its projects, both companies could suffer a ratings downgrade because of the huge costs of nuclear and uncertainty over future power prices. This would dent their share price at a time when they can ill afford this to happen.
This month, Russia’s state-owned power company Rosatom expressed an interest in a stake in Horizon. Director of communications Sergey Novikov said: “The British market is potentially attractive for Rosatom. Rosatom can give all guarantees that the construction of a nuclear power plant in the UK will meet absolutely all international safety requirements and International Atomic Energy Agency standards.”
In fact the exit of RWE-E.ON has opened the door of the UK power market to deep-pocketed companies like Rosatom and organisations in Asia.
David Simpson, KPMG’s nuclear partner, told PEi: “If we are going to go for a lower carbon future and we are going to have higher demand, we are going to need much more power plant. That implies very, very large sums of investment. The returns are going to have to be high enough to bring this capital in. That capital might come from existing shareholders or – and we are seeing increasing evidence of this – new capital coming in from the outside. And we are already seeing and are predicting much more capital from Asia.”
We will have to wait and see, but the UK power market may be on the verge of becoming more international than ever before.