COLUMN-When is support not a subsidy? UK nuclear: Gerard Wynn

Wed May 16, 2012 9:50am EDT

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By Gerard Wynn

LONDON May 16 (Reuters) - A British government argument that its planned support for new nuclear power stops short of a subsidy, to satisfy EU regulators and a coalition pledge, only adds to the sense of a policy in trouble.

The planned UK nuclear build programme would be the biggest in the developed world, but is under threat after the exit of two backers.

The economics are not helped by delays and cost over-runs at projects elsewhere in Europe and by low wholesale power prices.

The awkwardness of trying to stand by a commitment to "no subsidy," even while it accepts the technology needs support, risks boxing the government into a corner.

Its predicament illustrates how the technology is struggling to maintain a toehold outside emerging economies where costs are lower and there is vast unmet demand for electricity.

Whether the British programme proceeds will depend on cost, including the amount of price support, plus public acceptance of the technology and the government's "no subsidy" position, in the aftermath of a Fukushima disaster which has entrenched opposition among the environment lobby, its supporters and other opponents of nuclear.

As Vincent de Rivaz, chief executive of one of the key backers EDF Energy, said on Tuesday: "2012 is the defining year" for the UK programme. It's also a wider test case for the technology in the industrialised world.

STRIKE PRICE

The Conservative-led coalition government in May 2010 gave a green light for new nuclear power plants, which drew enthusiastic support from generators.

However, RWE and E.ON recently cancelled their joint plan to build new reactors, citing financing difficulties.

French utility EDF and UK-based Centrica will decide this year whether to proceed with their joint bid, alongside another partnership involving France's GDF Suez and Spain's Iberdrola.

Their decisions hinge critically on the exact nuclear power support price, under a so-called "contract-for-difference" scheme paying a guaranteed, long-term price per unit of power generated, whose cost will be passed to consumers.

In a twist which makes the scheme better value for money than a fixed feed-in tariff payment, the exchequer can claw back the difference if the wholesale power price exceeds the agreed strike price.

The government will likely indicate the level of support price before year-end, to help kick-start investment.

"NO SUBSIDY"

The coalition government pledged "no public subsidy" for nuclear in its "programme for government" in May 2010.

Former energy and climate minister Chris Huhne outlined how a support price would still meet that commitment, in remarks two years ago backed on Monday by his successor Edward Davey.

Their case seems to confuse state aid with subsidy, however, arguing that price support would be equally available for other low-carbon technologies - a possible exemption for state aid but not a subsidy.

The International Energy Agency, energy watchdog to developed countries and as good an authority as any, defines subsidy as follows (in its annual World Energy Outlook):

"The overall value of subsidies ... is calculated here as the price per unit of energy paid to ... producers for their output over and above the prevailing market price (or reference price), multiplied by the volume of energy supported."

Assuming that the agreed strike price, when finally announced, is above the present wholesale power price - and it wouldn't be economic otherwise - then it's a subsidy.

Huhne made the government's case as follows:

"There will be no levy, direct payment or market support ... unless similar support is also made available more widely to other types of generation."

"Arguably, few economic activities can be absolutely free of subsidy in some respect, given the wide ranging scope of state activity and the need to abide by international treaty obligations. Our 'no subsidy' policy will therefore need to be applied having regard to proportionality and materiality."

STATE AID

The government's case looks better suited to win a European Commission state aid waiver, as the programme requires.

As Britain prepares electricity market reform which effectively all but ends liberalised pricing, it seems in a strong position to argue that support for nuclear is only alongside a suite of other support for renewables and even gas, as the country tries to balance energy aims including security and climate change.

But the demands of keeping its coalition government together, and in particular the junior Liberal Democrat partner with their long-held opposition to nuclear, means it is sure to try and stand by its "no subsidy" line.

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