Hinkley nuclear deal marries French, British ambitions

* UK must replace ageing plants to prevent capacity crunch

* France needs foreign sales to keep nuclear sector alive

* Treasury intervention brought talks close to collapse

* Deal requires nuclear state aid approval from EU

By Geert De Clercq and Karolin Schaps

PARIS/LONDON, Dec 17 (Reuters) - Hinkley Point C, the first nuclear plant order in Europe since the 2011 Fukushima disaster, is the fruit of a decade-long process of reconciling two grand national ambitions: Britain's need to avert a power crisis, and France's need to keep its nuclear industry alive with export contracts.

If the EU raises no state aid objections to the project's 35-year power price guarantees and government-backed loans, it will pave the way for more new nuclear plants and make Britain one of the world's main battlegrounds for reactor builders from France, America, China, Japan and Russia.

Britain gave planning consent for the 16 billion pound (19 billion euro) plant near Bristol, southwest England, in March and signed a deal with French state-controlled utility EDF (EUREX: DE000A1XQ1S7.EX - news) at the end of October.

The deal had been nearly decade in the making and by the time the two European Pressurised Water Reactors (EPR) designed by France's Areva (Frankfurt: A1H9Y2 - news) produce their first power, 2023 at the earliest, another decade will have passed.

Years of talks came close to failure several times, and a deal never looked sure, despite an auspicious beginning.

When former EDF CEO Pierre Gadonneix stepped out of a 2006 meeting with British Prime Minister Tony Blair at 10 Downing Street, he could barely believe his ears.

"I was very surprised," Gadonneix, now retired, told Reuters. "I received a signal that EDF (Paris: FR0010242511 - news) was welcome to develop nuclear in Great Britain."

Blair even said there would be no objection if EDF wanted to take over state-controlled nuclear operator British Energy.

At the time, the nuclear sector in Europe and the United States had been at a standstill for more than a decade following the 1986 Chernobyl accident, and Britain had had a nuclear moratorium in place since 1989.

But a few countries had started looking at nuclear again, in particular Britain, which realised it was a decade away from a severe power capacity crunch.

Of Britain's 80 gigawatts (GW) of power capacity, around 40 GW would close down by the early 2020s, including seven of its eight nuclear plants, and 30 years later all existing capacity would need replacing.

At the same time, Britain's North Sea oil and gas reserves started to decline rapidly, turning it from net gas exporter to net importer in 2004.

Faced with that pressure, Blair's successor Gordon Brown in January 2008 launched a White Paper on Nuclear Power that plumped for the building of new reactors, a watershed for the post-Chernobyl industry.

STAYING ALIVE

EDF, too, had good reasons to want to build nuclear plants in Britain.

France operates 58 nuclear plants, of which most were connected to the grid between 1980 and 1990, and the last one, in Civaux, in 1999.

With more than 75 percent of French electric power already nuclear, EDF knew there was little need for more nuclear plants. Renewal of the fleet was also decades away, as France's pressurised water reactors have a 40-year lifespan, and similar reactors in the U.S. have been extended to 50 and 60 years.

To keep the industry alive, France had to export.

"It was crucial to rapidly develop new nuclear opportunities abroad, otherwise we would lose our competence," Gadonneix said, adding that the whole French nuclear supply chain was at risk.

In his last year as CEO, Gadonneix set up three massive deals to sell atomic expertise abroad.

In September 2008, he signed a deal to buy British Energy for 12.5 billion pounds. Later that year, EDF also bought a 49 percent stake in U.S. power group Constellation's nuclear plants for $4.7 billion and launched a project to build two EPR nuclear reactors in Taishan, China.

The U.S. plan came to nothing; the shale gas boom has made nuclear energy uneconomical there, and in June this year EDF said it was pulling out of the venture.

But in China, where EDF has had a partnership with China General Nuclear Power Corp for three decades, things moved fast, thanks to the experience of Chinese engineers, who have been building a series of reactors much as EDF did in the 1980s and 1990s. First (Other OTC: FSTC - news) concrete for the Chinese EPRs was poured in 2009 and 2010, and both are expected to become operational in 2014.

"The idea was to send young and old French expats to China, so that 55-year-olds could teach 35-year-olds. It was a project of knowledge transmission," said a former French government advisor.

PRICE GUARANTEES

Like the Channel Tunnel, a Franco-British project of similar scale and cost, the nuclear venture took years to materialise.

After the British Energy acquisition and its name change to EDF Energy, EDF had to clear various regulatory hurdles, including buying a number of nuclear sites earmarked for new plants, gaining regulatory approval for the new EPR reactor model in Britain and winning planning and environmental permits for Hinkley Point C.

"It's taken essentially from then until now to put in place the bits of the jigsaw," said a company insider.

Multibillion-euro cost overruns and years of delay for two EPRs being built in Finland and France, plus new safety specifications following the Fukushima disaster pushed up construction cost estimates to the point of casting doubt on the viability of new nuclear in Europe.

With this in mind, Britain started a review of its power market, aimed at creating more favourable market conditions for low-carbon energy sources like nuclear and renewable energy.

"We have been clear all along about the fact that something needed to change in the market design to make this scale of investment possible," a senior EDF Energy employee told Reuters.

The UK Electricity Market Reform (EMR), expected to come into force next year, includes a mechanism to guarantee a minimum electricity price for low-carbon power plants aimed at giving investors certainty about future returns. The EU review of the Hinkley Point deal will test whether the mechanism is compatible with EU state aid regulations.

About two years ago, EDF and the British government started talks on Hinkley Point C, focusing on how much the project would cost, how waste and decommissioning would be paid for, the guaranteed electricity price and how to spread risk.

"Government pushed hard to keep construction risk with EDF. It was a huge battle," said an industry source involved in the deal.

HELPFUL HITACHI

Towards the end of 2012, the energy ministry and EDF reached agreement, but the Treasury baulked at the figures.

It wanted to restart the process and revisit EDF's books to cut the strike price, a UK source close to the deal said.

"That's when EDF in Paris started to say, 'You know we can pull out of this'. That's when they were saying that maybe they'd rather write off a billion pounds than putting tens of billions into something which was not going to be profitable," the source said.

In February 2013, EDF's junior partner Centrica (LSE: CNA.L - news) pulled out of the UK nuclear new-build programme, in which it held a 20 percent stake.

The Hinkley Point deal looked close to falling apart. EDF cut 250 jobs in its British nuclear new-build division, and CEO Henri Proglio said the negotiations could fail if EDF did not get the return it wanted.

Investors in other British nuclear projects also got cold feet; Japan's Hitachi (Berlin: HIA1.BE - news) , which had bought the Horizon (Brussels: HOR.BR - news) nuclear build venture from Germany's E.ON and RWE (Berlin: RWE.BE - news) in October 2012, warned it would not go ahead with its own investment if the EDF deal collapsed.

"It was quite a helpful signal from Hitachi. It sent out a message to the UK government that it can't place all of its eggs in one basket," a second UK industry source said.

Besides Hitachi's Horizon project to build up to five of its Advanced Boiling Water Reactor designs in Wales and central England, France's GDF Suez (TLO: GAZ-U.TI - news) and Spain's Iberdrola (TLO: IBE-U.TI - news) are planning a new plant in the northwest.

Russia's Rosatom is also interested in building reactors in the UK, and Britain signed an agreement in October to allow Chinese nuclear companies to own UK plants.

Finally, it took a meeting between Britain's Prime Minister David Cameron and French President Francois Hollande to reignite the Hinkley Point talks.

The Treasury said in June it would shortlist the project for a loan guarantee, and the two sides signed a deal at the end of October.

"The EPR project at Hinkley Point represents a great opportunity for the French nuclear industry in a context of a renewal of competencies," EDF's Proglio said at the announcement of the deal.