LONDON (Reuters) - Britain's aim to expand its fleet of nuclear plants by 2025 will take place only if the taxpayer absorbs the burden of spiralling construction costs, allowing private companies to invest in the sector, a senior analyst said.
Nuclear energy policy in Britain faces major setbacks following reports that the cost of replacing ageing reactors increased dramatically in the past year, making power produced from new plants not affordable without government help.
A report from the Times newspaper on Monday said French nuclear developer EDF had raised the cost of building a nuclear power plant to 7 billion pounds from 4.5 billion pounds last year.
"If the latest cost figures are true, new nuclear power plants in the UK are not commercially viable," Citi analyst Peter Atherton told Reuters.
Based on the new figures, nuclear would be the most expensive form of electricity generation, exceeding even offshore wind, he said.
"The only way they could be built is if the construction risk was transferred to the taxpayer," Atherton said, equating to a multi-billion pound government insurance policy.
EDF's Flamanville reactor, which is under construction in France, is running four years late and at least double its original budget.
Britain's biggest nuclear power plant operator, EDF, which plans to build two atomic plants in the country, declined requests for comment.
The government must weigh the benefits of security of supply from developing nuclear power - it reduces reliance on foreign fuel imports - against the risk of underwriting the spiralling cost of construction, and decide which it favours, Atherton said.
"If construction costs are indeed anything like 7 billion pounds per reactor, then an already very challenging programme may be reaching the point of impossibility in our view," Atherton said in a separate analyst note from Citi on Tuesday.
Ministers will struggle to justify such inflated costs both politically and economically, he added.
Factoring in the new 7 billion pound construction cost and a standard 15 percent return on investment, EDF would charge about 166 pounds per megawatt hour of electricity produced from its proposed atomic plants - requiring a government handout of 115 pounds per megawatt hour, he said.
That exceeds subsidies on offshore wind farms, currently the most expensive source of electricity in Britain.
Britain is reforming its electricity market, which includes rewarding low-carbon power producers including nuclear with generous subsidies to encourage investment.
Current power prices are far too low - at 51 pounds per megawatt hour - to justify commercial investment into nuclear power without government help.
Transferring the risk of budget overruns onto the government's balance sheet would reduce the risk faced by the developer and reduce the cost of capital - essentially allowing them to charge less for the power produced, Atherton said.
No mechanism currently exists for allowing such a transfer, which would leave taxpayers facing an enormous risk over which they have little control.
Transferring risk could bring down the cost of electricity to 110 pounds per megawatt hour, which "could be sold to Parliament on the basis that it is still cheaper than offshore wind and that future reactors may cost less", he said.
EDF and utility Centrica plan to build Britain's first new nuclear plant at Hinkley Point in Somerset, with a final investment decision expected later this year.
In March German utilities E.ON and RWE pulled out of a 15 billion pound plan to build new plants.
The companies said Germany's sudden decision to phase out nuclear power, the high running costs of their Horizon joint venture and the long lead times required for nuclear plants resulted in the decision to sell the venture.
Sources also confirmed that the two utilities pulled out because they wanted more certainty from the government that nuclear investors would see a long-term return on their money.
The withdrawal may help EDF put pressure on the UK government to provide a favourable market framework for new nuclear plants, said Karen Dawson, director in the energy department at consultancy PwC.
Five groups, including Chinese, U.S. and Middle Eastern investors, are interested in buying E.ON and RWE's Horizon venture, a senior industry source said, highlighting international investor appetite for generous UK government handouts.
(Reporting by Oleg Vukmanovic, editing by Jane Baird)