Britain's need for nuclear could open door to Chinese investment

Wed Feb 27, 2013 11:09am EST

* China's first move into European nuclear seen possible in UK

* French firm EDF is dominant UK nuclear player and plans talks with Chinese

* Last British player in nuclear consortia walked away this month

* UK deal would mark split with U.S. where Chinese cyber attacks in focus

* Chinese state firms have $30-50 bln expansion war chest

By Karolin Schaps and Lorraine Turner

LONDON, Feb 27 (Reuters) - China could be on the cusp of one of its most sensitive European investments as costly plans for new nuclear reactors in Britain open the door to Chinese state-run firms.

Five years on from the sale of nuclear operator British Energy to France's EDF, the French firm is looking to build the first new reactor in the UK since the 1990s and plans talks with a Chinese partner.

Such a deal would be unthinkable in the United States, where the White House is stepping up diplomatic pressure and weighing tougher laws to stem the threat to U.S. businesses and security from China and other nations.

The Chinese military was accused of carrying out hacking attacks on companies, including British ones, by a U.S. cyber security firm last week, an allegation which Beijing's Defence Ministry has denied.

Yet Britain, Washington's closest political ally, looks increasingly likely to accept Chinese investment in sensitive projects given a weak global economy offering few alternatives for funding the billions it needs to replace ageing reactors.

"China is a trading partner to the United Kingdom with millions of pounds traded with them already," said Richard Ottaway, vice-chairman of the Conservative Party which heads the UK's coalition government.

"I don't see any difference in whether we talk about power generation or car production. If there are security issues, I'm quite sure we are capable of addressing them."

ENERGY OUTLOOKS DIFFER

EDF confirmed in January that it would start talks with China Guangdong Nuclear Power Corp (CGNPC) about forming a partnership to build nuclear power plants in Britain.

The idea took on new urgency this month, after Britain's Centrica, owner of British Gas, quit EDF's consortium.

That move underscored the diverging energy prospects faced by London and Washington as U.S. companies and consumers bask in discounted gas prices brought on by plentiful shale gas while Britain risks an electricity shortage as older plants close.

Britain foresees 200 billion pounds ($303 billion) in needed investment in energy by 2020 as slowing economies around the world constrain state budgets and force lenders and companies to retrench.

Centrica cited rising costs as one of the reasons it was quitting the project with EDF, which could cost as much as 20 billion pounds to build four reactors.

EDF also faces challenges as the bill for a plant it is building at Flamanville in France has risen to 8.5 billion euros from an initial estimate of 3.3 billion.

Further constraining nuclear funding are fears stirred by the March 2011 disaster at Japan's Fukushima plant, which has hurt public backing, delayed projects and prompted Germany to phase out nuclear altogether by 2022.

Germany's RWE and E.ON in turn opted to sell their Horizon nuclear project in the UK to Japan's Hitachi late last year.

In contrast, China is in the midst of an unparalleled nuclear building spree as it aims to more than triple its installed capacity by 2015 to 42 gigawatts (GW).

ACCEPTANCE AND CONCERNS

The British government has repeatedly said it is open to foreign nuclear investment provided that it meets UK standards.

It has backed up its openness to firms from China in other sectors already, with Chinese state firms buying minority stakes in London's Heathrow Airport and Thames Water, a utility serving 14 million Britons.

China's largest foreign takeover - state-owned entity CNOOC Ltd's $15.1 billion takeover of Canadian oil and gas company Nexen Inc which closed on Monday - includes access to British North Sea oil production as well as shale gas projects.

Yet some voices in Britain and France have urged caution.

The French government has launched an investigation into a 2011 deal signed between EDF and CGNPC to establish whether national interests were jeopardised.

In Britain, a parliamentary committee is probing foreign companies' participation in projects linked to national security, including a partnership between China's Huawei Technologies and BT Group.

"We've been examining the background to that particular series of events, to see whether there are any causes for concern or any lessons to be learnt," said Malcolm Rifkind, chairman of the UK's parliamentary intelligence and security committee.

Other politicians are calling on Britain to adopt an approach in line with that taken by the United States.

"I think the United States have approached the issue with their eyes wide open and with security pragmatism," said Mark Pritchard, a Conservative member of parliament who sits on a parliamentary committee on national security strategy.

As far as nuclear safety is concerned, China defends its standards and argues it has never had an incident higher than level 2 on the INES nuclear event scale where Fukushima was a level 5.

Yet critics say delay in disclosing details of a malfunction at a CGNPC plant near Hong Kong in 2010 is cause for concern.

"You can't divorce the company's problematic ethics from their corporate involvement in UK nuclear," said Paul Dorfman, founder of Nuclear Consulting Group and a former government adviser on radiation risks.

NEXT STEPS

Ultimately, whether CGNPC is brought aboard the EDF project could hinge on the outcome of current talks between the French firm and the British government aimed at setting a guaranteed minimum price for electricity generated from the planned plant.

Details have not been disclosed, but it is clear the UK government faces a delicate balance between seeking the best price for cash-strapped consumers and offering a level of return that will entice French, and possibly Chinese, investment.

For the Chinese, beyond further experience in reactor construction, a UK deal could mean a long-term investment that generates an attractive return.

Britain could see a series of nuclear reactors built at five sites over the next 12 years, yet changes in the ranks of the three groups planning the work have sparked doubts about timelines and funding.

In addition to EDF, France's GDF Suez and Spain's Iberdrola aim to build up to 3,600 megawatts (MW) of nuclear capacity at a site in West Cumbria, in northwest England, while Hitachi has plans for up to 6,000 MW at two sites.

Some believe a successful Chinese role alongside EDF could open the way for further investment in the sector. China's state-owned companies have a war chest of some $30-50 billion for international expansion, PwC has calculated, based on Beijing's latest five-year plan.

"This is a trend we will probably be seeing globally where Chinese companies will become part of consortia around technologies that they're helping to build in China," said George Borovas, head of the international nuclear projects team at law firm Pillsbury, who has advised foreign companion UK nuclear investments.

"The UK might be one of the first to see this happen, it's going to be a first try," he said.