PARIS/LONDON (Reuters) - Britain signed a deal with France's EDF (EDF.PA) on Monday to build a 16-billion pound ($26-billion) nuclear plant, the first European country to offer state guarantees in order to fund a nuclear project.
The Hinkley Point C project in southwest England, the first new nuclear plant in Europe since the Fukushima disaster, is expected to start producing power from 2023. The government will guarantee it a price of up to 92.50 pounds ($150) per megawatt-hour of electricity for 35 years, more than twice the current market rate, EDF and the British government said on Monday.
The deal shows the level of backing that nuclear power plant developers now need for new projects in Europe, where costs for new atomic energy have surged after regulators imposed stricter safety rules following the 2011 Fukushima disaster.
The project will need EU approval and Energy Secretary Ed Davey told reporters Britain plans to submit an application for state aid clearance to the European Commission later this week.
"I'm confident we will manage to argue our case," he said.
Direct market support for new reactors is unprecedented in Europe since utilities started to be privatized about two decades ago. Britain will be the first country to seek EU state aid approval for the nuclear support it plans to provide through its "Contracts for Difference" scheme, under which it intends to pay generators fixed wholesale rates for power.
The scheme will depend partly on suppliers passing costs on to consumers through bills, an issue that has risen to political importance over recent weeks after the Labour opposition party promised to address rising energy bills by freezing prices.
Earlier this month the Commission ruled out including a reference to nuclear power in revised state aid rules, an indication the UK request could be difficult.
Brussels-based lawyers have questioned whether Britain's nuclear support scheme falls under EU state aid guidelines.
Stephen Thomas, professor of energy policy at the University of Greenwich, said the scheme could be classified as illegal state aid if it looked likely to distort the UK power market.
"There is a strong case for this, considering that a large chunk of the British electricity market is given to one bidder on very preferential terms, guaranteed by the state, which are not available to other competitors," Thomas said.
He added the EU may not reject the plan outright, but could impose such conditions that EDF would be unable to obtain financing for the project.
An EDF-led consortium plans to build two Areva-designed 1,650 megawatt European Pressurised Water Reactors (EPRs) that will produce about seven percent of British electricity needs at current levels and will operate for 60 years.
EDF's long-time Chinese partners, China General Nuclear Corporation (CGN) and China National Nuclear Corporation (CNNC), will take a combined 30-40 percent stake in the consortium, while French state-owned Areva (AREVA.PA) will take 10 percent.
Discussions are also taking place with a shortlist of other interested parties, which could take up to 15 percent.
China's CGN is building two EPRs in China, and the firm hopes the UK project will give it the credibility to eventually sell Chinese-designed reactors in Europe.
British finance minister George Osborne said during a visit to China last week that Chinese nuclear firms could hold majority stakes in British plants in future.
Britain needs to replace 20 percent of its ageing coal and nuclear power plants over the coming decade and securing power supply is a key plank of the Cameron government energy policy.
The government said the construction of new nuclear plants will reduce household energy bills by more than 75 pounds per year in 2030 compared with a scenario without new reactors.
"(The deal) won't touch consumer bills, it won't touch industry bills until ten years' time," Davey said.
EDF said the guaranteed electricity strike price for Hinkley Point could fall to 89.50 pounds if it was allowed to build a second nuclear plant at Sizewell, in east England.
Monday's deal also includes an unusual clause that would force any future British government to reimburse the EDF-led consortium for its investments if it decided to shut down the Hinkley Point project for reasons other than safety or security.
Davey refused to give details about how much the consortium would be paid and how long this guarantee would be valid, saying they would be disclosed at a later date.
Following the Fukushima disaster, nations worldwide reassessed support for atomic energy. Germany decided to phase out nuclear power, Italy scrapped a planned nuclear program and France has pledged to cut nuclear to 50 percent of its electricity mix from 75 percent today.
"If the UK does a U-turn like Germany in 15 years, then the consortium will be compensated. That is sensible. Politics can always change," said Ingo Becker, head of utilities research at Kepler Capital Markets.
Britain's opposition Labour Party, which is ahead in opinion polls going into a 2015 election, said it also supported nuclear power and would scrutinize the details of the deal.
EDF plans to make a final investment decision on the project by July 2014, after getting EU approval and securing financing.
EDF shares were virtually unchanged on the news but Areva shares closed up 11.3 percent.
(Additional reporting by Sarah Young in London and Barbara Lewis in Brussels; Editing by Giles Elgood and Sophie Walker)