The £10 billion auction of British Energy was dealt a fresh blow yesterday as Iberdrola of Spain, one of the last remaining bidders, pulled out of the race, saying the price was too high.

The announcement from Ignacio Galán, the chairman of Iberdrola, was a rebuff for John Hutton, the Business Secretary, and Alistair Darling, the Chancellor, who were laying out an ambitious vision yesterday for the future of Britain’s nuclear industry.

Addressing an audience of 80 captains of industry including Richard Lambert, the CBI chief, executives from Toshiba of Japan, Areva of France and a host of FTSE chief executives, Mr Hutton said that Britain aimed to become the world’s number one location for new nuclear investment. He announced a range of initiatives designed to smooth the way, including the creation of an Office for Nuclear Development and a Nuclear Development Forum.

But the withdrawal of Iberdrola, the owner of Scottish Power, has left the Government’s plans for building new nuclear power stations in a precarious position. EdF of France, whose initial bid of 680p to 700p a share was rejected by British Energy’s board this week, remains the only serious potential bidder. EdF was last night considering its position. A decision is expected shortly.

RWE of Germany, which declined to comment, is in theory still in the running but its position is highly questionable as it was viewed as a likely joint bidder with Iberdrola.

Industry sources are still confident that a deal will proceed. “I’d be very surprised if that deal [EdF buying BE] does not now go through,” said one.

EdF will first need to raise its bid, and even then the prospect of an EdF purchase of British Energy, whose eight nuclear and one coal-fired plants generate one sixth of UK electricity, remains fraught with complications.

Ofgem, the industry regulator, is concerned about the implications for competition – a contentious issue in Britain’s highly consolidated power market and the subject of two separate investigations. EdF, which also declined to comment, would probably be forced to sell at least one BE site – Bradwell on the Essex coast. It could also strike a side deal with Centrica, the British Gas owner, to appease regulators.

Such action could be just the start. EdF, Europe’s largest energy company, cannot generate enough electricity for its British customers and there are fears that it would take much of British Energy’s output to supply them, forcing up wholesale electricity prices.

“There will be a huge impact on power market liquidity,” one industry source said. Any deal is therefore likely to be closely scrutinised by the Competition Commission, while EdF is already under investigation by the Competition Directorate in Brussels.

The Government wants to push through the sale of British Energy to enable a buyer to begin construction of a new generation of reactors, which are likely to be built on existing nuclear sites. The auction has been plagued with difficulties. Three of British Energy’s ageing power plants, Torness, Sizewell and Hunterston, broke down during the sale process, a sign of the urgent need to replace them.

New nuclear plants remain central to the Government’s energy policy. Nuclear power generates about 19 per cent of UK electricity but the proportion is set to fall to 7 per cent by 2020 if older plants are closed as scheduled.

A glitch at Sizewell B triggered blackouts that hit up to 500,000 UK homes last month. Hopes for a resolution of British Energy’s ownership before the parliamentary recess next month are fading.

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