ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.
Britain is in the grip of a cold snap of sub-zero temperatures, keeping spring at bay and sprinkling snow on daffodils. The unwelcome chill will have one useful effect; it will concentrate minds in Westminster about the urgent need to settle Britain's energy strategy, which is still log-jammed after almost a decade of dithering. The debate has shifted from policy to hard dollars as ministers are now jousting with EDF Energy, the U.K. arm of France's leading power company, over the long-term price at which it will supply electricity to the grid from new nuclear power stations – a deal which Canadian pension funds may yet be part of.
Strange as it may seem to energy-indulged Canadians, Britain suffers an energy deficit. If the country fails to replace old nuclear and coal-fired electricity generation plants that must be retired over the next decade, the shortfall will lead to power cuts. EDF is proposing to build two nukes to supply base-load power, but it will not break ground on the multi-billion pound projects without a satisfactory electricity price. This is to be guaranteed in a contract for difference, under which the nuclear power supplier will be topped up with guaranteed payments from electricity consumers if the wholesale cost of power falls below the "strike price." EDF wants a high strike price of £100-plus ($152.9) per megawatt/hour to compensate for the huge building cost, as well as to help the utility sell the deal to financiers. But the government, fearing that expensive nuclear power will be the last straw for voters pinched by austerity measures, wants to keep the strike price below triple digits.
EDF needs a financial backer; it recently lost its main U.K. partner, Centrica, which owns British Gas, when the latter lost its nerve over the rising cost of building nukes and a lack of confidence in government commitment to nuclear power. Over the weekend the Canada Pension Plan was named as a possible infrastructure partner, alongside Britain's Universities Superannuation Fund.
Canadian pensioners already have a large stake in U.K. infrastructure; OMERS and Ontario Teachers last year bought into the high speed rail link to the Channel Tunnel. Canadian funds own bits of British water companies and regional airports. Energy in Britain shouldn't be a hard investment to sell: guaranteed steady demand, experienced operators and a fair legal system. It wouldn't be hard if it were not so hedged with question marks, and not just political ones. EDF's reactor of choice, the EPR, has proved to be a construction headache; the first project built in Finland is years and billions of euros behind schedule while the second, an EDF project at Flamanville in France, is also suffering huge cost overruns and delays. The French utility argues that these were teething problems with new technology, and that its EPR project in China is on budget and on schedule.
But the government has accepted the EPR, and the remaining question is whether it can agree an electricity price that makes the investment risk palatable to EDF, to its bankers and perhaps, to a Canadian fund.
Whether or not a deal is done with EDF, the British energy dilemma still offers long-term opportunities to Canadian infrstructure investors. Even with a few nukes, the gap in Britain's energy supply will widen over the next decade. The only alternative to coal is a huge increase in natural gas-fuelled power generation and Ofgem, the energy regulator, has repeatedly warned about a sharp increase in gas prices as North Sea resources dwindle. Europe's appetite for liquefied natural gas (LNG) has tripled over the past decade and the price remains stubbornly high, in the absence of a North American LNG export industry. Meanwhile, politicians squabble over the safety of shale gas exploration in highly populated areas, fret over the cost of nuclear energy and worry about dependence on Russia. The smart money assume that demand for LNG imports into Europe will soar over the next decade. The question is, who will supply it?
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.