Britain's nuclear future uncertain as relations with China Fray

Once the heart of the U.K.'s energy plans, nuclear has been sidelined by spiraling costs and cheaper renewables. It also finds itself at the center of a diplomatic row spanning trade and human rights that threatens to undermine how the sector is financed.

Relations between China and the U.K. have been strained as the row over Huawei Technologies Co. intensified. When sweeping new national security laws were introduced in Hong Kong Prime Minister Boris Johnson offered its citizens the right to live and work in Britain.

China warned the U.K. Monday it will face "consequences" if it chooses to be a "hostile partner" after it emerged the government is planning to phase out the company's equipment in the U.K.'s 5G telecommunications networks.

For nuclear, the sticking point has become the once-feted relationship with China General Nuclear Power Corp. that's supposed to deliver the next generation of large nuclear plants. That link has come into sharp focus as the U.K. scrambles to find a funding model for projects that aren't getting any cheaper.

Without CGN, its money and its technology, the U.K. will be left with a huge funding gap that other investors don't seem willing to fill. It'll also leave the country's nuclear plans in disarray.

"Equity funding for nuclear power stations is very difficult for private actors," said Rob Gross, director of the U.K. Energy Research Centre. The risks are significant, timescales long and individual projects are very large. That's why governments have always played a role in nuclear power, he said.

CGN's involvement in Britain's nuclear industry started in 2016 when a deal was signed with Electricite de France to cooperate on a trio of reactors totaling 8.7 gigawatts starting with Hinkley Point C in southwest England.

Nuclear remains important for the British government but it's becoming increasingly pushed to the margins of energy policy as cheaper wind and solar have taken center stage.

Nuclear power has traditionally been seen as a low-carbon way of supplementing renewables -- and as such a key part of the future energy mix envisioned in a net zero world.

Losing nuclear power probably wouldn't pose a threat to the U.K.'s ability to generate enough power. The gap could be filled by gas, batteries or small modular reactors that can provide back-up to renewable energy and keep the lights on.

The sector is also important to the country as a way of building a large, skilled workforce and creating a supply chain using British companies.

In 2017, ministers envisioned building 18 gigawatts of new projects but one by one each project folded, unable to negotiate the financing, leaving just EDF and CGN.

The government's offer in 2018 to Hitachi to take a third of the equity at the Wylfa nuclear project wasn't enough to keep the company interested.

How best to finance the technology, which costs billions, has become the latest hump in the road for policymakers. The Hinkley Point reactors - expected to start producing power by 2025 - have been hit by delays and cost overruns.

"The precise funding model for nuclear is up to the government to decide," an EDF spokesman said.

That project will now cost as much as 22.5 billion pounds ($28.1 billion), taking into account inflation, and the guaranteed price of power is significantly higher than the latest round of offshore wind projects. Sizewell-C, still in the planning process, is slated to cost 20 billion pounds.

EDF is struggling and can't afford to finance Sizewell on its own. The utility has cut costs and jobs, and pared investments setting out a plan to divest at least 10 billion euros of assets from 2015 to 2020 to help fund its share of Hinkley Point.

The industry favors paying for the massive projects through a Regulated Asset Base model, a proven success on other infrastructure projects. The previous Conservative government was thought to back the financing option but the idea looks to be losing traction.

"If the Chinese pull out, then Sizewell will still go ahead but EDF will be unable to take on another major project," Elchin Mammadov, a Bloomberg Intelligence analyst, said "So, Bradwell will be dead or put on hold for another decade."

The debate has gone quiet following a consultation on the RAB model which closed in October.

RAB likely wouldn't transfer enough risk from the project's backers -- EDF and CGN. The government would have to offer some kinds of guarantee on the project in order to get private investors to finance it.

One option would be for the government to take either a majority or minority stake in Sizewell C.

"I wouldn't be surprised if what is adopted is either a model with many of the characteristics of RAB, or potentially consideration of a more direct stake. This is about reducing the cost of capital." said Tom Greatrex, chief executive officer of the Nuclear Industry Association.

But despite the long delays, there's no indication that the government's made up its mind how it will proceed.

"We are currently considering responses to inform the best approach to the financing of future nuclear projects," a spokesperson for the Department for Business, Energy & Industrial Strategy said.

As much as 80% of electricity will be produced from low carbon sources by 2030, according to scenarios modeled by the U.K.'s Committee on Climate Change.

"With all but one of the nuclear fleet set to retire by 2030, and uncertainty over the scale of the new build program, it is likely that more electricity from renewable sources will be needed," said Jonathan Marshall, head of analysis at the Energy and Climate Intelligence Unit.