Centrica nuclear withdrawal: Q&A

RELATED QUOTES

SymbolPriceChange
IBDRY26.69+0.05
SSE.L1,499.00+4.00
CNA.L342.80+0.40
HTHIY71.67-0.01
RWE.DE28.66+0.22

Centrica (LSE: CNA.L - news) has scrapped plans to take part in the building of new UK nuclear reactors, blaming spiralling costs and delays.

Why more nuclear?

Although Britain pioneered atomic energy in the 50s with the world's first civilian nuclear power station, the share of UK electricity generated by nuclear - currently around 20pc - is in decline as its 15 active reactors gradually go into retirement.

In 2008 the Government gave the go-ahead for a new generation of nuclear power stations to help plug the gap which will be left behind by this wind-down.

Furthermore, it plans to build more nuclear capacity into the system to help meet its pledge for 15pc of power to be from renewable sources by 2020.

Who's in?

Centrica's departure leaves just four players left in the field, none of which are British.

French utilities giant EDF Energy intends to build four new reactors at Hinkley Point in Somerset and Sizewell in Suffolk.

Japanese giant Hitatchi has confirmed plans to build two or three new reactors at Wylfa on Anglesey and the same at Oldbury in South Gloucestershire, after acquiring German venture Horizon from RWE (Xetra: 703712 - news) and E.ON.

NuGeneration - a joint venture between French GDF Suez and Spanish group Iberdrola (Other OTC: IBDRY - news) plans to built up to 3.6GW of new nuclear capacity at Moorside, near Sellafield.

Who else has pulled out?

Scottish and Southern Energy (SSE (LSE: SSE.L - news) ) was originally a partner in the NuGeneration venture, but pulled out in September 2011 saying it lacked the expertise. It made allusions to escalating costs at the time, saying "nothing comes cheap in the nuclear industry".

German utility firms E.ON and RWE retreated in March 2012 after Japan's Fukushima disaster accelerated Germany's withdrawal from nuclear power. Both companies decided in separate reviews that the project was unfeasible due to financial constraints.

They sold their joint venture Horizon to Japan's Hitachi (Other OTC: HTHIY - news) for £696m in October.

What's spooking them?

Historically, nuclear power stations - which typically cost £4bn to £5bn to build - have been bankrolled by governments, since they are considered too risky by the private sector. Nowhere in the world has a private company built a nuclear power station without some form of government guarantee on construction.

"It's just an enormous cost to take for any company if they are not 100pc sure it will come in on time and on budget" said Peter Atherton, an independent energy equities analyst and formerly head of European utility sector research at Citi.

But the British government - through reluctance to add debt to its balance sheet and a deal struck with the Lib Dems not to subsidise nuclear - has insisted all the risk must be carried by private sector investors.

Instead it is incentivising companies through a revenue guarantee - although it is yet to be decided what this figure will be.

How will the UK miss out if none of the nuclear investors are British?

Although much initial investment into preparing the ground for a new station will create work for local construction firms and British materials suppliers, most work beyond that is likely to create value outside the UK as companies buy in equipment from their own suppliers in their home nations.

Mr Atherton said while it was a good thing British companies were avoiding such a risky enterprise, that ultimately most of the profits will end up overseas.

He added that the best value for consumers would have come from state-financed construction, which would have had lower capital costs since governments enjoy lower borrowing costs than private sector companies.