IS A NEW NUCLEAR AGE ON ITS WAY?

Just 15 months ago, the Big Six utility companies were repeatedly complaining that the Government had no strategic plan for energy. There had been 10 energy ministers in 12 years, rarely in their post for more than 18 months.

No one had any idea how £110bn would be raised to build a raft of new nuclear power stations and wind farms. This lack of "big thinking" meant infrastructure investors had little interest in the UK, despite its crumbling old pipes, pylons and power plants.

Months and months of lobbying later, the picture is now very different. The Energy Secretary, Chris Huhne, is due to confirm in a White Paper on Tuesday that electricity market reform is really happening this time and it's being billed as "the biggest shake-up of the industry since privatisation".

In the same stroke, Mr Huhne, a former nuclear sceptic, will hand millions of pounds in subsidies from consumers to companies promising to build the UK's first atomic power stations in a generation.

The changes could transform this country's energy outlook. And yet there is still scepticism about whether the financial incentives will be enough to encourage all the billions of pounds of investment needed for eight new nuclear power stations and a vast array of wind farms dotted across the North Sea and the English Channel.

"There was a complete vacuum in energy policy, so my view is that this is progress," says Omar Abbosh, managing director of utilities at Accenture. "It's better than what we had before, but construction risk remains. It will probably not deliver all the low carbon capacity that the UK needs in time to hit its targets."

There are two main pressures on the UK's energy market. First, a third of Britain's power plants, mostly coal and nuclear, must close by the end of the decade under safety and environmental laws. Second, the UK has signed up to ambitious European Union targets promising to reduce its carbon dioxide emissions. This means more new nuclear and wind power generation and less coal and old nuclear.

At the heart of the problem is the fact that it does not make any sense for companies like EDF, Centrica, RWE, E.ON, Scottish Power and Scottish and Southern, to build new nuclear power stations or wind farms without heavy subsidies. The current electricity price is around £70 per megawatt hour. But the price would need to be somewhere closer to £100 per megawatt hour for companies to think of nuclear as a good investment and £148 per megawatt hour for anyone to class offshore wind as viable, according to a Government-commissioned study by Mott MacDonald.

At the moment, offshore wind receives subsidies worth £140 per megawatt hour for the electricity it produces, which is more than enough for developers to see the attraction of putting up concrete and steel turbines along the UK coastline. It's therefore nuclear - despite Mr Huhne's claims about "no subsidies" - that will be getting extra financial encouragement.

Effectively, the new measures confirmed on Tuesday will artificially raise the price of electricity, guaranteeing companies a certain amount per megawatt hour for each technology by a certain date. This way, investors can be sure that spending on new power plants or turbines for the UK will earn them money in return. In the unlikely event that the market price of electricity rises above the fixed price of the subsidy, consumers will be able to pocket the difference.

Another subsidy, called a capacity mechanism, will pay power generators to make plant available, even if a power station is idle. This is needed because of the uncertain output of wind turbines, which need affordable, back-up power that can be switched on and off quickly.

However, there is concern that no subsidy level has yet been set while the cost of building new generation capacity keeps rising. Japan's nuclear disaster will add to costs because of time delays and additional safety features required by subsequent reviews. Meanwhile, the raw material costs for wind turbines have been increasing for years with the price of steel soaring - although this has recently levelled out.

Dr Michael Porritt and Laura Platchkov, experts from the University of Cambridge and the Energy Policy Research Group, have raised further questions about the difficulty of setting subsidy levels in a report for the Consumers' Association.

"If [the subsidy] level is too low, they risk under-supply, hence jeopardising the environmental agenda. If they are set too high, they risk inducing windfall profits for generators and unnecessarily high consumer prices.

"The danger of this happening might be lower with more mature technologies such as onshore wind, but is more acute with less mature technologies where learning rates and hence costs curves are subject to large uncertainties."

This is proving particularly worrying for the industry. Roger Salomone, senior energy adviser at the trade body, the EEF, says manufacturers may be relieved to get a fixed cost for their electricity, even if it is higher, as it will help them to make more accurate costings. However, there is currently not enough information on how high that price will be and concerns that the level of subsidy may be set too high.

"We're hoping for more detail on what we're going to pay but don't think we're going to get it," he said. "One major area of concern is the cost of the whole package for the industry. We just want a picture of how all the costs are going to add up."

Early estimates suggest that the whole package of measures will cost £3bn to £10bn for consumers and £10bn to £32bn for the industry.

Potential costs are slightly clearer for domestic consumers than specific industries, because the Government has published very preliminary predictions on customer bills. Last December, it estimated there would be an extra £100 on annual bills over the next decade and £160 by 2030.

This was before the current round of price rises by Scottish Power and British Gas, where wholesale costs have forced electricity prices up by about £85 per year.

However, Ofgem, the energy regulator, has taken all green taxes and extra cost of networks into account to work out that bills could actually be up to 50pc higher. There are already £100 of green taxes on the average £1,000 duel fuel bill, but this means there may be an extra £500 by the time all the concrete for new low-carbon power has been poured.

Consumer groups resignedly point out that no option will be painless - unless, perhaps you're a utility company or employee in the industry.

The Big Six will gain from any major construction programme that will come from overhauling Britain's energy industry. Scottish and Southern, Centrica and even coalburning Drax "all stand to benefit from these measures", according to Dominic Nash, of Liberum Capital.

The owners of current low-carbon generation operations, such as old nuclear and wind farms, will also gain as these companies do not have to take on the risk of building new plant and their assets will benefit from huge subsidies.

Despite all this cost, there is still a strong risk the reforms will not deliver the desired outcomes in the right time-frame.

Mr Abbosh, of Accenture, believes additional guarantees might be needed for nuclear power, before companies are willing to take on the construction risk. Some nuclear power stations are more likely than others, he believes. EDF, partnering with Centrica, and backed by the French government, has the financial clout to put behind flagship nuclear stations that will act as an advertisement for its industry prowess to other countries. In contrast, the German utilities, RWE and E.ON, are still reeling from their home country's decision to withdraw from nuclear altogether.

"Is EDF going to build nuclear?," Mr Abbosh says. "The answer is yes. The question is will we get all the others in time? No. It's a big commitment that companies - and consumers - are being asked to make."

The companies, publicly anyway, are more hopeful. Vincent de Rivaz, chief executive of EDF Energy, hails the new electricity market reform as good for the companies, Government and consumers because it will "stabilise" rising bills.

Volker Beckers, chief executive of RWE npower, affirmed to The Sunday Telegraph this weekend that the UK is "a core market" for the parent company. They will no doubt be watching closely over the coming months as the actual level of subsidy is set.

"What's happening is we're hanging out the bait and we'll see who bites," says one senior public official. "We're hopeful that this will be enough. But no one can rule out introducing more carrots in the future."

"It's a big commitment that companies - and consumers - are being asked to make Omar Abbosh, Accenture

From The Sunday Telegraph