February 4, 2013 6:23 pm

Nuclear power: fission for investors

Centrica’s UK exit suggests the task is too daunting for the private sector

Is there nobody willing to pay up to keep the lights on? The decision by Centrica on Monday not to invest in new UK nuclear plants suggests that developing the next generation of nuclear power is too daunting a task for the private sector.

Since the 2011 Fukushima accident in Japan, nuclear power has been gripped by regulatory hesitancy, lengthening construction schedules and rising costs. Centrica has clearly had it with the uncertainty; the UK group thinks a £500m share buyback is a better use of shareholders’ money. Maybe. If private sector utilities will not invest in nuclear power, however, who will?

To answer that question, it is worth examining the economics of nuclear energy. The Nuclear Energy Agency says the investment cost of a nuclear plant, including construction, accounts for 60 per cent of the total cost over its life. A further 25 per cent is made up of operating and maintenance costs; the rest is for fuel and decommissioning.

Unlike gas or oil-fired power plants, with their sensitivity to fuel prices, nuclear power is most sensitive to financing costs. Investors start to earn returns only after heavy initial outlays, and typically after 10 years.

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Even that is in an ideal world where regulation is certain. When regulatory uncertainty prevails, as it does today, the calculations become equally fraught. Fukushima is one factor; Germany’s move to phase out nuclear energy is another. Eon, RWE and SSE have pulled out of the UK nuclear market in the wake of these developments.

True, some investors are willing to come in. Hitachi of Japan bought the German utilities’ UK nuclear assets, while China’s CGNPC is likely to join EDF in developing the projects in which Centrica was involved. But attracting private sector capital is proving almost impossible.

There are more than 60 nuclear reactors under construction around the world; low-carbon nuclear must be part of the global energy mix. If governments want to attract private capital, they must be more realistic about pricing, cost and regulation.

Email the Lex team in confidence at lex@ft.com

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