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Chancellor to halt plans for overhaul of UK energy industry

Hinkley Point C nuclear power station, operated by Electricite de France SA's (EDF),. Photographer: Luke MacGregor/Bloomberg
Hinkley Point C nuclear power station, operated by Electricite de France SA's (EDF),. Photographer: Luke MacGregor/Bloomberg

Chancellor of the Exchequer Philip Hammond is blocking a set of government proposals to overhaul the U.K. energy industry because of the potential spending implications for a new prime minister, people familiar with the matter said.

The plans are included in a long-awaited energy white paper that the business department has been working on for months, according to the officials, who asked not to be identified because the policies haven’t been announced. Measures include the way nuclear power plants get funding, boosting technology to capture industrial greenhouse gas emissions for storage, accelerating the decarbonization of the power industry and efforts to make housing more energy efficient.

Business Secretary Greg Clark had hoped to publish the proposals in July, but Hammond is reluctant to give the go-ahead to new spending before a successor to Theresa May is in place, the people said. Former Foreign Secretary Boris Johnson is the overwhelming favorite to win the contest, which pits him against the incumbent in the Foreign Office, Jeremy Hunt.

The Department for Business, Energy & Industrial Strategy didn’t immediately reply to a request for comment. The Treasury declined to comment.

Hammond’s reticence is slowing efforts to eliminate U.K. greenhouse gas emissions by 2050 and spur a nuclear renaissance. The government has estimated it needs to draw in 100 billion pounds ($126 billion) of investment for electricity networks over the next few years to replace aging coal and atomic generation plants.

Ambitions to fund a new fleet of nuclear facilities took a blow earlier this year when Hitachi Ltd. pulled out of the Wylfa project in Wales. Toshiba Corp. also withdrew from a major development earlier in the year.

Whitehall officials across departments are also concerned the document is both incomplete and too sizable a policy plan to put forward just before a new premier takes over, according to two of the people familiar. One option being considered is to publish more urgent sections before recess leaving the rest for the next government to handle.

If Johnson wins, as expected, neither Hammond nor Clark are likely to remain in their cabinet jobs. That’s because Johnson has said his cabinet members will have to be prepared for the U.K. leaving the European Union without a Brexit deal — something that Hammond and Clark have said they can’t support. The new prime minister will be announced on July 23.

Setback for Industry

The nuclear power industry has been anticipating the announcement of the new financing model for months. The government was expected to use what’s called a regulated asset base to help fund the construction of new projects that can take years to deliver.

Infrastructure projects can be so big and take so long to pay off that few companies are willing to shoulder the cost alone. EDF’s project at Hinkley Point relies on a guarantee that the utility will be paid 92.50 pounds for each megawatt-hour of electricity it produces, almost double the current rate in the wholesale market. EDF, which took all the construction risk and will earn nothing until the plant is finished, has said it probably can’t handle building another such project.

That has forced the government to rethink its own resistance to take a stake in industry.

A new funding model also is needed to spur carbon capture and storage projects. Those have long been touted as the answer to the world’s climate woes, since they can absorb emissions from existing coal plants, cleaning up the energy industry without new technologies.

So far, exorbitant costs of CCS and a lack of government support have limited the industry’s expansion to projects that demonstrate the technology. In 2015 the U.K. scrapped funding of 1 billion pounds ($1.3 billion) for a competition to stir the industry into action. That failure followed similarly flawed competitions in 2012 and 2007.

Calls for large-scale carbon capture to be built in the U.K. resurfaced last year after a scientific report from the United Nations said the technology is needed for all pathways to limit global warming to 1.5 degrees Celsius (2.7 Fahrenheit).

Late last year, the government announced its latest push with millions of pounds of support for projects aiming to have a large-scale facility up-and-running by the 2030s.

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