January 11, 2019 / 12:57 PM / 2 months ago

Breakingviews - Hitachi jitters place UK nuclear at crossroads

The old Wylfa nuclear power station is seen behind the village of Cemaes, northern Wales February 22, 2013. REUTERS/Suzanne Plunkett

LONDON (Reuters Breakingviews) - Japanese cold feet are about to land Britain’s energy policy in hot water. Hitachi could next week halt its involvement in the Wylfa nuclear power project in Wales, Nikkei reported on Jan. 11. For a UK government that wants reactors to increase their share of domestic power generation from around a quarter to a third by 2035, that’s a sizeable headache.

Viewed from a Japanese perspective, Hitachi’s jitters are rational. Nuclear provides only 4 percent of the company’s revenue, but the projects have big capital costs that consume a lot of free cash flow. Since domestic peer Toshiba announced it was quitting its British nuclear operations in November, equity investors in Tokyo have asked why Hitachi isn’t following suit by shelving its commitment to finance a third of the 6 billion pound equity component of the 16 billion pound Units 1 and 2 of Wylfa. Hitachi shares jumped 8.6 percent following the Nikkei report on Friday.

Nuclear’s warm glow has dimmed in the United Kingdom since the government in 2016 agreed to pay 92.5 pounds per megawatt hour to Electricite de France and its Chinese partner to build the Hinkley Point C project. Solar power is now feasible without state subsidies and the cost of offshore wind contracts has dropped to 57.5 pounds per megawatt hour. This makes renewable energy an ostensibly more attractive source of zero-carbon power than expensive and complex nuclear projects.

The actual picture is more nuanced, though. The UK also wants security of energy supply, which nuclear provides. As sun and wind power are unpredictable, they require backup sources which can cost 25 to 30 pounds per megawatt hour. That makes Wylfa’s cost of about 70 pounds per megawatt hour look better value, and future units on the same site should be cheaper. A November ruling by the European Court of Justice that the UK market for backup energy is anti-competitive adds to the risks of focusing on renewables.

Still, if Hitachi pulls out, it’s unclear who will step in. British plans to inject 2 billion pounds of public money into Wylfa’s equity had already raised eyebrows. Asking taxpayers to take over Hitachi’s share and another 2 billion pounds from the Japanese government would be highly controversial. So would replacing Japanese investment with more Chinese cash. The alternative, however, is to put the whole project on hold – and risk doing the same to UK nuclear power.

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