Electricity firm EDF has confirmed it wants the UK government to sign 40-year contracts to support building new nuclear reactors in Britain – as the national energy regulator warned prices are likely to rise higher than expected.
The French-owned company is in talks with ministers over "contracts for difference" funding, under which the government guarantees generators will be paid a minimum price for electricity from new nuclear plants: if the market price falls lower than this "strike price" then a surcharge will be added to customers' bills; if it rises higher there would be a refund.
The Guardian reported on Tuesday that in order to keep the strike price at below the politically crucial £100 a megawatt hour, ministers and officials are proposing the contracts will last for up to 40 years, double the original timescale. On Tuesday it emerged that EDF's chairman, Henri Proglio, told analysts and investors that the company was in talks over 40-year contracts when the company published its annual results in Paris last week.
The UK's Department of Energy and Climate Change (Decc) said on Monday no final agreement had been reached. However insiders acknowledge such long deals could have trouble passing both EU state aid rules, and nuclear critics who are already angry the government has reneged on a promise that there would be no public subsidy for new nuclear power.
Pressure on ministers to get a deal with EDF was highlighted on Tuesday when Alistair Buchanan, head of the energy regulator, Ofgem, warned that UK customers face higher bills for years to come as gas imports rise to replace ageing power stations taken out of service.
In an attack on previous policy, Buchanan said the situation had arisen because of "the car crash of a policy-driven vision of sustainability and the environment from 2004-2008 – that needed massive sums of money backing nascent technologies – smashing into the financial crisis."
Energy experts said longer contracts for new nuclear power would help bring the price guarantee down from early estimates of £140-160 per unit to under £100, and bring down the overall cost because they would reduce risk and make it cheaper for EDF to borrow the estimated £12-£16bn building cost.
"At the moment that certainty would appear to be more of a benefit to the owner-operator of a new plant, but clearly the government needs to get things moving on generation new builds," said Martin Young, head of European utilities research at Nomura. "It would support the government's low-carbon policy and reduce the volatility in power prices."
But ministers could also face a headache if energy companies demand similar subsidies to build new gas plants.
"This is a real possibility because the incentive to build new gas power plants is lost if market prices are distorted by significant nuclear capacity supported by very rich contracts for difference," said Nigel Robinson, head of power advisory at Investec bank.
According to Ofgem, gas is likely to double to 60% to 70% of power generation by the end of this decade.
Buchanan said reserve margins for generation capacity were set to fall from 14% to 5% within three years, though he played down the threat of power cuts to households because many energy-intensive industries have contracts that stipulate their supply can be cut at times of peak demand.
His warnings are a challenge to the chancellor, George Osborne, who has promoted a "dash for gas" as the way of keeping the lights on and keeping energy bills low for consumers and businesses.