The future of the U.K.'s nuclear industry will be decided on one number: the price the government's willing to guarantee Electricite de France SA will get for generating atomic power.
EDF and government officials will negotiate the so-called strike price for new nuclear power plants by the end of the year. To ensure the Paris-based utility makes a final decision on a new reactor in southwest England, the U.K. must set a price between 95 pounds ($148) and 105 pounds a megawatt-hour in 2020, double the level power trades at today, according to Bloomberg New Energy Finance.
Britain, trying to replace aging plants and cut carbon dioxide emissions, is one of just three western European countries still pursuing plans for new nuclear stations following the Fukushima disaster last year. Safety enhancements have contributed to rising nuclear costs, leading to concern U.K. consumers may pay too much for new reactors.
"Discussions are happening in smoke-filled rooms, over champagne and croissants, to establish a price that we will all pay," said Ian Marchant, chief executive officer of the U.K.'s second-largest energy supplier SSE Plc (SSE), which dropped plans to develop reactors in September. "There is no transparency as to what that price will be."
A survey of eight analysts by Bloomberg News suggested a new reactor could cost 4.9 billion pounds to 7.5 billion pounds. EDF and partner Centrica Plc (CNA), the U.K.'s largest residential energy supplier, are among four companies still considering nuclear new-build in the U.K. Three utilities including SSE and Germany's RWE AG (RWE) and EON AG (EOAN) have dropped nuclear new build plans since September.
That's left EDF as the lead company negotiating with the government over long-term price guarantees proposed in draft energy legislation in May. The bill seeks to alleviate the risk of building nuclear reactors and renewable energy projects like offshore wind farms, which are expensive to construct and can take decades to recoup initial investments.
"The strike price will not be defined in a cozy way through a hidden set of decisions," said Vincent de Rivaz, CEO of EDF's U.K. unit. "We are in favor of a balanced deal because what is not balanced is not stable."
EDF rose 0.8 percent to 16.87 euros in Paris. It has fallen 12 percent this year, valuing EDF at 31.2 billion euros.
Centrica spokesman Julian Mears declined to comment.
The bill proposes guaranteeing prices for low-carbon electricity including nuclear reactors and offshore wind farms using a so-called feed-in tariff with contracts for difference. Under the policy, if wholesale power prices drop below a government-established level known as the "strike price," investors in nuclear power stations and renewable projects will be compensated by suppliers up to that level. If prices are higher, suppliers and consumers will be reimbursed by investors.
Wholesale power prices for the month ahead traded at 41.82 pounds a megawatt-hour yesterday, according to broker prices compiled by Bloomberg.
Until the bill becomes law, the government will directly negotiate with companies like EDF and Centrica that intend to make investment decisions within the next 12 months. The legislation may face challenges by the European Union and energy suppliers could be liable for the contracts, weighing on their credit ratings, SSE's Marchant said.
Value for Money
"It's only in consumers' interest if you reduce the cost of capital to the industry as a whole," Marchant said. "If we're going to go ahead and support new nuclear we should be playing hard ball and make sure we get a good price for it."
Any contract between a developer of new nuclear and the government will be "subject to negotiation focusing on delivering a fair deal which is affordable, provides clear value for money, and is consistent with the government's policy on no public subsidy for new nuclear," the Department of Energy and Climate Change press office said by e-mail.
Rising commodity prices and the need to replace a fifth of the U.K.'s power generating capacity over the next decade will drive up household bills with or without reform, according to the department.
When negotiating with the department of energy, EDF will argue that costs of nuclear have increased significantly given delays at reactor construction sites in France and Finland, as well as post-Fukushima safety precautions, according to Bloomberg New Energy Finance analyst Brian Potskowski.
Increased Capital Costs
Based on increased capital costs and a rate of return of 10 percent to 11 percent, the company will need a guaranteed power price of 95 to 105 pounds, he said. The upper limit on this strike price is 130 pounds, which is the compensation level for offshore wind, he added.
"If the U.K. government really wants new nuclear built, there aren't any other options on the table other than EDF and Centrica," Daniel Grosvenor, head of Deloitte LLP's nuclear team in London, said in a telephone interview. "All the utilities are going to look at this as a robust investment decision. No one is going to take a punt."
EDF has struggled to control costs and meet deadlines at its showcase EPR reactor-site in Flamanville, Normandy. The EPR will cost around 6 billion euros and start selling power commercially in 2016 compared with a previous estimate of about 5 billion euros and a start date of 2014, it said in July last year. Executives have blamed delays on the fact that the reactor is a first-of-a-kind, unlikely to be repeated in Britain.
Prior to the Fukushima disaster, the utility said building a new 1,600 megawatt reactor in the U.K. would cost an estimated 4.5 billion pounds a reactor.
"What you have is a whole bunch of people saying they know what a new reactor will cost and they don't," Liberum Capital's Dominic Nash said by phone. "They have no idea of pre-building expenses, the raw material costs of steel, copper and cement eight years out, or of construction costs in the U.K."