Cost overruns and prolonged uncertainty dissuade Centrica from UK nuclear investment

Centrica has withdrawn from its nuclear rebuilding partnership with EDF in the UK, citing rising costs, delays, and regulatory uncertainty. The utility must now decide where and on what to focus its resources, with potential opportunities arising in gas and offshore wind.

Centrica has withdrawn its 20% stake in its partnership with EDF to build new nuclear capacity in the UK. Four new EPR reactors are planned at Sizewell C (Suffolk) and Hinkley Point C (Somerset). Centrica acquired the option in 2009, along with a 20% share in the eight nuclear plants currently operated by EDF, which Centrica will retain. At that time Centrica raised GBP2.2bn in additional capital to finance the options, of which it will launch GBP500m in share repurchases to return capital to shareholders in 2013.

Centrica's decision comes as no surprise, and EDF has been looking for new partners since September 2012. EDF's most advanced discussions are with China Guangdong Nuclear Power Group (CGNPC), with which it is already working to build two new EPR reactors in Taishan, China.

Chinese capital could assist EDF at a time when it lacks sufficient capital to see its investments in the UK to fruition alone. However, no confirmation from CGNPC is likely before any concrete figures come out of the discussions between EDF and the UK government on Contracts for Difference (CfD) feed-in tariffs, which were most recently rumored to be around GBP100/MWh.

The rising costs and longer-than-expected construction times weighed heavily on Centrica's decision. It is less clear, however, whether the potential revenue flows, primarily determined by the level of the CfDs, were a critical factor.

Centrica now needs to decide where it will reposition its resources, and swiftly. It has already written off GBP200m in predevelopment costs in 2012, and will likely prioritize investments with shorter development times such as offshore wind. This is likely to fare just as well as nuclear under the new Electricity Market Reform, with the added benefit of requiring a smaller upfront stake. Although the excess capital will be returned to shareholders, the decision to write off the nuclear stake will leave Centrica with more breathing room to evaluate alternative opportunities, such as gas projects, expansion in the US market, or an acquisition of the Irish government-owned retailer Bord Gais Energy.

Written by Yasmin Valji

Analyst, Datamonitor Energy Team

Follow Yasmin on Twitter: @YasminV_DMEN 

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