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Saving British Energy

By Siàƒ¢n Green

Privatized nuclear power company British Energy has sought government assistance to help stave off insolvency.

Troubled UK nuclear power company British Energy has secured a second tranche of emergency aid from the government to save it from insolvency. The government has loaned the generator à‚£240m ($376m) on top of the à‚£410m loan given in early September.

Falling prices: British Energy has suffered from falling wholesale electricity prices in the UK
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The loans follow an announcement in early September by British Energy that it faced insolvency if it did not receive immediate financial assistance. They will help the company meet immediate needs and continue trading, and give British Energy a further two months to consider its future.

Shares in British Energy, which supplies around one-fifth of the UK’s electricity, fell from à‚£0.8 at the beginning of September to a low of à‚£0.05 by mid-September. The share price now stands at à‚£0.18, valuing the company at à‚£113m, compared with over à‚£4bn four years ago.

The company’s financial difficulties have raised questions about the wholesale market ” Neta ” in England and Wales. Wholesale electricity prices have fallen by 40 per cent since Neta was proposed in 1998, and by 20 per cent since it went live in March 2001. The system was designed to increase competition and transparency in the electricity market. Prices now average à‚£16/MWh compared with the à‚£19/MWh that British Energy needs to break even.

The UK’s Electricity Association points out that the financial pain resulting from low wholesale prices is being felt by all generators, not just British Energy, and that current price levels are not sustainable. The UK’s Drax power station recently announced that it would not be able to meet interest charges on part of its debt. AES Drax has complained publicly about the government’s financial aid to British Energy.

The low wholesale prices are partly due to overcapacity in the market. Power and gas regulator Ofgem says that there is 25 per cent overcapacity and that this must be reduced before prices reach an equilibrium. Ofgem CEO, Callum McCarthy expects the market to show when existing units need to be mothballed, but bringing forward the decommissioning of nuclear units is not a palatable option for British Energy.

According to Mikhail Masokin, senior utilities analyst at Datamonitor, it is the generators with no end consumer base that are suffering the most. “Most of the money being made in the power industry is through the supply of end consumers,” comments Masokin. “And British Energy doesn’t have much of a customer base as it sells mostly to utilities. Wholesale prices have declined by 40 per cent but retail prices have not fallen in line with this.”

British Energy is being criticized for selling the small customer base of 1m that it had in Swalec, which it sold to Scottish and Southern Energy. “British Energy needs to expand its customer base,” notes Masokin. “It needs to focus on winning large industrial and commercial consumers.”

British Energy and its shareholders are also unhappy about the fact that those who buy its output have to pay the Climate Change Levy, a tax introduced to encourage the growth of renewable energy. Although the company owns one 2000 MW coal fired plant, its output is overwhelmingly nuclear generated, producing no carbon dioxide.

“Exempting nuclear power from the Climate Change Levy would help tip the scales in favour of nuclear and away from coal and gas fired generation, and this would help British Energy,” notes Masokin.

The company’s financial woes have been compounded by technical difficulties with some of its nuclear units in the UK. Its Torness 2 reactor was shut down in May 2002, while Torness 1 was taken out of service in August 2002. One unit at Dungeness B was also shut down in August for unplanned maintenance.

Reducing costs will be difficult for British Energy, explains Masokin. “British Energy is saddled with decommissioning costs which are included in the cost of energy it supplies. Its fixed costs, which need to be amortized over time, are higher than those of other generators. British Energy’s plants were built at a time when it was assumed that a certain market price level would be guaranteed, but now the rules of the game have changed.”

British Energy could sell its 50 per cent stake in AmerGen Energy, the US nuclear power station operator which it owns with Exelon. It is thought that this business could fetch à‚£200-300m, and British Energy is already exploring this option.

A number of companies are obvious candidates for taking over its assets, including EDF and Entergy. Billionaire businessman Warren Buffett, whose company owns Northern Electric and Yorkshire Electric in the UK, is rumoured to be considering a bid. In addition, US fund manager Fidelity International bought just over nine per cent of British Energy stock in mid-September.

The UK government appears keen to make nuclear energy a long-term part of the UK’s electricity industry but is unlikely to want to make further financial commitments. The interest shown in British Energy by Buffett, Fidelity and others is promising, but it will be a difficult task to make nuclear attractive to investors while keeping a level playing field for all.