Chinese nuclear investment in Europe

China is rapidly becoming a global leader in nuclear power station development. It currently has 14 reactors in operation and a further 25 under development. But to smooth the way for nuclear development beyond its borders, Chinese companies need to build a reliable international project track record, preferably under a well respected western regulatory regime. E.ON and RWE’s sale of the Horizon UK nuclear development consortium offers this opportunity. But there are some formidable regulatory hurdles to be overcome first.

September 10, 2012

China is rapidly becoming a global leader in nuclear power station development.  It currently has 14 reactors in operation and a further 25 under development.  But to smooth the way for nuclear development beyond its borders, Chinese companies need to build a reliable international project track record, preferably under a well respected western regulatory regime.  E.ON and RWE’s sale of the Horizon UK nuclear development consortium offers this opportunity.  But there are some formidable regulatory hurdles to be overcome first.

 

UK government concerns

China’s UK nuclear interests were back in the headlines last week after it was reported that two Chinese utilities were interested in taking a stake in the EDF lead consortium (NNB Genco) which is developing the first of the UK’s new generation of nuclear plant at Hinkley Point in Somerset.  This follows reports last month that the UK government is concerned about a Chinese company acquiring Horizon.

The problem is not Chinese ownership per se, but Chinese control.  Chinese companies and China’s main Sovereign Wealth Fund (CIC) have already made a number of investments in UK infrastructure (e.g. Thames Water, Felixstowe port, Grangemouth oil refinery), with Chancellor Osborne visiting China earlier this year to encourage further infrastructure investment.  The concern is that a majority Chinese stake in Horizon poses a potential threat to national security given the strategic nature of nuclear assets.

These concerns can to a large extent be addressed by ensuring a sensible ownership structure for Horizon (e.g. having a UK company as plant operating partner).  This would be assisted by a clear set of guidelines governing foreign investment in strategic assets.  The government’s decarbonisation agenda has already committed it to relying on vast sums of foreign capital investment.  If the government is to deliver on that agenda, particularly in relation to nuclear power, keeping Chinese investors onside will be critical.

 

 

Chinese leverage will likely prevail

There are two Chinese contenders for Horizon:

  • State Nuclear Power Technology Corp of China in consortium with Exelon (the largest US nuclear operator) and Toshiba Westinghouse
  • China Guangdong Nuclear Power Corp in consortium with Areva.

These are the same two Chinese utilities that have been reported as having an interest in a stake in the EDF led development consortium.

There are a number of factors that make Chinese interest in UK nuclear development an attractive proposition for the UK:

  • Chinese cash reserves offer a means to overcome the huge capital expenditure hurdle associated with nuclear development in a capital constrained investment environment
  • China has an established track record developing projects with both of the major reactor developers Areva and Westinghouse
  • Chinese companies offer the opportunity for the UK to diversify away from the existing French (EDF/GDF) led consortiums backed by Areva
  • It is likely that Chinese led nuclear development would mean more UK jobs and a greater investment in the UK nuclear skills base than the French led consortia (which are relying heavily on personnel based in France).  

With the withdrawal of SSE and sale of Horizon, the UK government’s nuclear policy is under pressure.   EDF is compounding the problem by indicating it is looking to reduce its share in the NNB Genco consortium that it is leading.  In the absence of any compelling alternative bids for Horizon, these factors give the Chinese based consortiums considerable leverage over the UK government.

 

But Chinese investment will still depend on policy conditions

Horizon is currently little more than a holding company for the UK nuclear site options it has acquired, so its intrinsic value is limited.  This means that the Chinese may be able to buy Horizon as a relatively cheap option on developing nuclear capacity and expertise in Europe if the market and regulatory conditions are favourable.  In addition, a minority stake in the EDF led consortium would provide valuable insight into negotiations around government support and progress with Hinkley Point.

But before Chinese companies commit to investing in new nuclear projects, they will presumably want to see much more clarity from the government on the nuclear policy support framework under EMR.  The key issue will be details on the FiT/CfD contracts that will support nuclear development.  To date the decisions around nuclear policy support appear to have been largely determined behind closed doors in bilateral negotiations with EDF.  The emergence of Chinese investor interest means this may be about to change.

 

 

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