The Government’s energy strategy hinges on contracts to guarantee investors the price they will receive for power generated by new plants.
But Charles Hendry, the energy minister, said on Tuesday that the Government could not provide the direct Treasury-backed guarantees investors want, because of EU state aid rules.
Ministers are yet to explain exactly who will act as the counterparty instead of the Treasury, but industry figures warned the Energy Select Committee that alternatives would be less credit-worthy and so would push up costs.
Volker Beckers, chief executive of RWE npower, said the counterparty was “crucial”. When the contracts for difference (CfD) – the power price guarantee framework – were proposed last year, companies expected they would be “backed by government”, and that effectively the Treasury would ultimately be “signing the cheque”. “Now we are miles away from that point,” he said.
Investors could no longer count on a “AAA-backed contract” and that “inevitably has an impact” on the cost of capital, he said.
RWE and E.ON pulled out of a UK nuclear joint venture in March, citing financial difficulties in Germany, and are seeking a buyer.
A consortium led by EDF will decide this year whether to build new reactors in Somerset and is negotiating with ministers over its CfD.
Mr Hendry told MPs that, instead of Treasury-backed guarantees, the proposed CfD system would be “delivered” by National Grid – but if a future government reneged on agreed power prices, the energy companies could then sue the Government for costs.
“EDF says that there are other ways in which it would be cheaper for them but we are yet to be persuaded that that would be permissible under state aid rules,” he told The Daily Telegraph.
Tim Yeo, energy committee chairman, said the proposal was “bound to push up the cost of capital and, at worst, may deter investment”. He urged ministers to raise the issue of state aid with the European Commission “urgently”.
