The harsh reality for the UK as Hitachi pulls the plug

Hitachi's decision to suspend its UK nuclear development programme is awful news on any number of levels.

Firstly, of course, for the 400 or so workers already involved in building the new nuclear plant at Wylfa Newydd on Anglesey in North Wales.

Secondly, for the 9,000 workers who would have been employed building that plant and a second one at Oldbury-on-Severn in south Gloucestershire.

:: Hitachi to suspend work on UK nuclear plant

Thirdly, for the 850 people who would have had full-time jobs at the two stations once they were completed by the company's UK subsidiary, Horizon.

And fourthly, for the government, whose plans to build a new fleet of nuclear power stations is now in tatters.

New (KOSDAQ: 160550.KQ - news) nuclear build was a key element in Britain's drive to decarbonise its economy and meet its climate change objectives.

That is now in doubt as the country is obliged to depend for longer on fossil fuels to keep the lights on as Britain's existing fleet of nuclear power stations is pensioned off in the 2020s and early 2030s.

Worse still, the departure from the scene of Hitachi comes just months after another Japanese company, Toshiba (Swiss: TOSH.SW - news) , pulled the plug on plans to build a new nuclear power plant at Moorside, in Cumbria.

That leaves the UK entirely dependent on China General Nuclear Group (CGN), the state-owned company that is partnering EDF Energy of France in building Hinkley Point C in Somerset, the only new nuclear power plant in Britain currently under construction.

CGN and EDF (Paris: FR0010242511 - news) are keen to build new nuclear power plants at Bradwell in Essex and at Sizewell in Suffolk.

However, with CGN set to be the leading partner in the Bradwell project, it remains to be seen how comfortable the government is with a state-owned Chinese company playing such a dominant role in the construction of such a key piece of national infrastructure.

The exit of both Toshiba and Hitachi also means that, with only one other player now participating in UK new nuclear build, the government's ability to negotiate better terms is severely hampered.

What will particularly worry ministers is that, contrary to some reports, the "strike price" - the price that the government was prepared to guarantee Hitachi for electricity generated by the new plants at Wylfa and Oldbury - does not appear to have been the stumbling block.

Hitachi had been promised £75 per megawatt hour (roughly enough to power 2,000 homes for one hour) for its electricity.

That is above the £62.50 at which electricity to be supplied tomorrow is trading in the power markets today, reflecting the upfront costs and risks Hitachi was taking on in building the new stations, but looks a bargain compared with the £92.50 that EDF is being guaranteed for the first 35 years of Hinkley Point C's life.

Duncan Hawthorne, chief executive of Horizon, told me it was not a row over the strike price but the overall funding model that the government wanted to use to underpin the project that was at fault.

Greg Clark, the business secretary, told the Commons that the arrangement would have seen the government take a one-third stake in Horizon.

Hitachi had wanted the government to go further than that but Mr Clark said he was not prepared to expose taxpayers to that kind of risk.

It is possible that the project could be brought back to life. Mr Hawthorne suggested to me that one solution could be to adopt what is known as a "regulated asset-based model", under which Hitachi or whoever takes on the project would receive payments for the new stations as they are being built, rather than being guaranteed a set price for the electricity they generate once up and running.

Mr Clark confirmed to MPs (BSE: MPSLTD.BO - news) that this is one of the options under consideration and that the government will make an announcement in the summer.

Some will say that, if the government is that desperate for new nuclear power plants to be built, it should shoulder all of the costs itself.

Investors in private companies always look for the earnings flow generated by the businesses they back and building nuclear power plants is a hard sell due to the huge upfront costs and the time it takes for any investment to show a return.

This appears to have been a factor for Hitachi which, having just paid $6.4bn for the power grids arm of Swiss industrial giant ABB (LSE: 0NX2.L - news) , finds itself pretty stretched, financially speaking, just now.

Mr Hawthorne acknowledged to me that there was certainly a case for government bearing all of the risk itself in new nuclear build.

There is also a point to be made here about the kind of skills Britain will need in future.

The UK led the world in nuclear energy and, for decades, boasted some of its best nuclear engineers.

But the generation of people who built and worked on the UK's existing nuclear fleet are now largely retired.

It had been hoped that, following on from Hinkley C, Moorside and Horizon would have created a new generation of skilled British workers with an exportable talent to generate wealth for the country.

That there will not be a new power plant at Oldbury, in particular, will also pull at the heart-strings of older employees in the nuclear industry.

The old power station at Oldbury, which was used as a location in the 1976 Doctor Who serial The Hand of Fear, was where most of them underwent their training.

This sorry saga also highlights an issue that goes beyond the energy sector. It is bad enough that Britain, once a world leader in nuclear energy, now finds itself reliant on French and Chinese state-owned companies to build new nuclear plants of its own.

But the bigger concern will be that foreign companies appear increasingly reluctant to invest in UK infrastructure.