Centrica looks hard at its nuclear option

CENTRICA’S finance director Nick Luff is busy trying to work out if the new coalition energy secretary Chris Huhne is a man the country’s largest gas and electricity supplier can do business with.

Huhne – a Liberal Democrat – had previously described nuclear power as a “failed technology.” But that was before he scented the beautful aroma of power: now firmly ensconced in the cabinet, Huhne last month said that he now backed the government’s policy of building 10 new nuclear power stations over the next 20 years, as long as no public subsidy is used.

This matters to Centrica, which runs British Gas, because it owns a 20 per cent stake in British Energy (which it bought for £12.5bn two years ago along with French rival EDF). The two firms propose to erect two French-designed enhanced pressurised reactors at Hinckley Point and then two more at Sizewell at around £4bn each, with the first one ready by 2017 at the earliest.

After Huhne’s u-turn Luff, 42, thinks he can work with the Lib Dem politician even if he recognises that he will not have an enthusiastic supporter of nuclear power at the heart of government. He says: “Everyone will have to think about the country’s security of supply in the future. It is pretty obvious that nuclear has got to be part of that. The government as a whole has been supportive.”

However, Luff _ wiry and thoughtful man – is impressed with the speed with which the coalition has moved on this issue. Sitting in Centrica’s London offices just behind Savile Row in the West End, he says: “I am delighted about that. A nuclear building programme could have fallen by the wayside, given the problems the budget deficit. But instead they have given us their view early on.”

However, Huhne may have set an unrealistically high bar for nuclear builders by saying no public subsidy must be used to build them. This has not happened anywhere in the world for many years. Nevertheless, Luff thinks it will be possible to raise all the cash in the private sector, even in this fragile post financial crisis environment.

He says Centrica was able to finance the £400m Lynn and Inner Dowsing wind farm project (located off the Lincolnshire coast) that started in 2008 and spanned the financial crisis. And Luff is confident he and EDF can raise ten times that amount for nuclear expansion.

He says: “The appetite is there. But strong companies like us have to raise it, and government has to set a stable investment environment for long-term investors.”

The task facing the UK energy industry is nevertheless daunting. It will have to find £200bn over the next decade to upgrade its nuclear, wind, gas and clean coal power stations – and make sure 15 per cent of all of this energy comes from renewables as EU guidelines specify.

Centrica itself plans to spend £15bn over this period. Luff is confident the business can find this cash, pointing out the firm produces £1.5bn of cashflow every year (he does not rule out a cash call if extra investment is needed). The last time the company went to its investors was in 2008, when it raised £2.1bn to buy British Energy and North Sea gas producer Venture Production for £1.3bn.

Last month the business put out a strong trading statement: it added 200,000 new customers, so it now serves 15.9m residential consumers. Analysts expect its 2010 full-year operating profit to hit £2.1bn, compared to £1.9bn last year.

Luff is also keen to provide cash for the business to grow in North America, where it trades as Direct Energy. The firm operates three power stations in Texas, and a couple of gas fields in Alberta, Canada. And just last week it bought Florida-based energy services firm Clockwork Home Services for $183m (£125m) in cash to further boost its position in the US market.

Luff says Centrica is looking at investment options in gas storage, gas exploration, wind power, in the US as well as nuclear development. He is keen to stress the firm does not have all its eggs in one atomic basket – undoubtedly a prudent move, regardless of the coalition’s current thinking on the subject.