15 October 2002 – The wholesale UK electricity market reacted to the news that TXU Europe may have to go into administration by marking prices up £1.5 ($2.33) per MWh to £19.50 per MWh yesterday.
The potential for further fallout in the market particularly from AEP and AES, the remaining US-owned power generators in the UK, saw prices jumping to a level last seen in January 2002.
Last night, TXU was in talks with its bankers, bondholders and trading counterparties seeking to stave off the threat of administration after its parent company refused to furnish a promised £700m loan to be used to renegotiate power contracts with suppliers.
The contracts with the five generators covers 5000 MW, but were taken out when UK wholesale power prices were 40 per cent higher.
David Kurtz, Director of analysis at Datamonitor commented, “Although TXU Europe will continue business in the short term, its medium-term prospects are uncertain. With one credit rating agency downgrading the unit to junk, deals with trading partners need urgent renegotiation.” Kurtz said that a major partner such as E.ON might buy TXU Europe to protect itself from the fallout.
Informal approaches are believed to have come from E.ON of Germany, which owns Powergen, and Scottish & Southern Energy, both of whom have contractual relationships with TXU and would be hit hard if the company were to collapse.
The weakness in UK power prices is underpinned by an overcapacity in the UK power sector, which may force more generators to close units. These include British Energy’s coal-fired plant in Eggborough and plant owned by Innogy, following Powergen’s recent example of mothballing two of its generators. Ed Wallis, Powergen CEO, has already stated in the press that up to ten stations need to be closed to cope with the turmoil in the market.
“Meanwhile the sector waits for ministerial support in making changes to the electricity trading market, and an upward trend in wholesale power prices,” said Dataminitor’s Kurtz.