TAXPAYERS were warned yesterday that they must be prepared to pick up a multi-billion-pound bill to meet the liabilities of the UK's nuclear power industry.

An investigation into the running of the nuclear generator British Energy has uncovered a serious flaw in the way it sets aside funds to cover the costs of decommissioning power stations, disposing of waste and meeting its safety obligations, leaving the taxpayer facing "a significant risk".

Such concerns will provide further ammunition for opponents of plans to build a new generation of nuclear stations. The Treasury is understood to be unhappy at the prospect of taking on responsibility for the open-ended bill for future liabilities.

The nuclear industry is legally obliged to make provision for the return of all nuclear power stations to greenfield sites once they are decommissioned. The estimated cost of that work has risen by GBP 1.165 billion during the past year to GBP 5.287 billion, but the sum set aside to cover those costs is nowhere near that total.

The government baled out British Energy in 2002 after it ran into financial difficulties, largely because of the size of the potential bill for future decommissioning. Under the deal, the company agreed to pay 65 per cent of its cash-flow into a fund to cover the cost of future liabilities. But an investigation by the National Audit Office (NAO) has raised serious concerns about the nature of that deal.

In its report, published today, it warns there is no guarantee the money raised will cover the boundless liabilities and that the return is based on an electricity market that has proved "particularly volatile" in recent years.

"This uncertainty places a significant risk in the hands of the taxpayer. The Department [of Trade and Industry] has put in place arrangements to manage this risk, but the report identifies scope to strengthen these arrangements further," it says.

Sir John Bourn, the head of the NAO, said the taxpayer was responsible for underwriting "a large and uncertain liability". He said: "The scale of the net liability to be borne by the public purse will depend crucially on British Energy's performance in future years. It is therefore vital that the department keeps close scrutiny to ensure the taxpayer's position is safeguarded."

Edward Leigh, the Tory MP who chairs the Commons public accounts committee, said: "The government has taken a step into the dark in order to keep the lights on."

Jean McSorley, a nuclear expert with Greenpeace, said there was no way of knowing what the final bill might be.

British Energy, which has eight nuclear power stations, including Torness and Hunterston B, said the size of the bill facing taxpayers was not its concern.

A DTI spokesman said: "Our overriding objective in restructuring British Energy was to maintain nuclear safety and security of electricity supply.

"If the company had fallen into administration, all of its nuclear liabilities would have fallen to government anyway, the company could not have updated liabilities estimates in the time available and we could not walk away from them.

"Moreover, our financial analysis showed that to make the company viable, we would need to remove these liabilities. That's why we took direct responsibility for meeting some of those historic spent fuel liabilities."