By Selina Williams and Geraldine Amiel
The U.K. government has agreed that the guaranteed fixed price for electricity from a new nuclear power plant that Electricite de France SA (EDF.FR) wants to build would be fully linked to inflation, said people familiar with the matter, a move that would add tens of billions of pounds to the total cost of electricity from the reactors.
The agreement to inflation-link the electricity price EDF would receive--known as the strike price--for 35 years substantially eases the financial risks for the French utility for constructing two nuclear reactors, but there is still no deal on the actual price, the people said.
The whole nuclear plant will cost about 14 billion pounds ($22 billion) each to build.
EDF, the world's largest nuclear operator, seeks a strike price between GBP95 to GBP100 per megawatt hour of electricity while the government would rather settle around GBP80 to GBP85 per megawatt hour, one of the people said. The current wholesale electricity price is around GBP48/MWh. The talks are expected to continue for several weeks, the person said.
Whether EDF and the U.K. can reach an agreement is seen as a litmus test for nuclear energy and its economic viability in Europe. The talks come at a time when the U.K. government is weighing up the costs of new nuclear reactors, which are key to hitting carbon-emission goals and maintaining an adequate level of electricity supply, against popular discontent over high energy prices that are contributing to rising living costs.
A spokesman from the U.K.'s Department of Energy and Climate Change declined to comment on the details of the talks and whether the government had agreed to link the strike price to inflation.
"[The] government is working closely together on these negotiations with EDF. We've been clear that an agreement will be reached only if it is fair, affordable, offers value for money for consumers and is consistent with the government's policy of no public subsidy for new nuclear," the spokesman said.
The agreement links the strike price, which amounts to an indirect subsidy for nuclear power, to an inflation measure called the consumer price index, one of the people said. This would dramatically increase the costs to taxpayers, said Roland Vetter, head of research at CF Partners, an environment and energy advisory, trading and investment firm.
"Indexation is important because it will increase the subsidies every year in line with inflation and the public therefore will carry the long-term inflation risk in their electricity bills, even though the projects have limited inflation risks once they are constructed," said Mr. Vetter.
According to Mr. Vetter's calculations, a strike price of around GBP95 per megawatt hour that was linked to inflation would yield accumulated revenues to EDF of around GBP143.5 billion over the 35 years of the contract, compared with GBP85.75 billion if the contract weren't linked to inflation.
His calculations are based on an assumption that there will be an eight-year planning and construction period before the 35-year price guarantee kicks in, and annual consumer price inflation of 2% over the period. Inflation stood at 2.7% in May, according to official figures, and has averaged over 2.8% in 2012.
Increasing the strike price in line with inflation could make investments in new nuclear power plants more attractive to pension and infrastructure funds, because it would offer them a guaranteed long-term return, Mr. Vetter said.
The U.K. government is seeking to build new nuclear reactors to replace aging ones and curb its carbon emissions. It has been in talks over the past two years with the French power group to provide two to four new reactors, which it would build and manage at the current site of the Hinkley Point nuclear plants in Somerset, southwest England.
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Corrections & Amplifications
This item was corrected at 10:43 a.m. EDT to show that the whole nuclear plant will cost about 14 billion pounds to build. The original incorrectly stated the cost would be only for the new reactors.