The fate of British Energy has been the focal point of the electricity market during the past month and has even sparked a row between the government and Ofgem, the industry regulator, on the best approach to the company. The government has been concerned that if it does not intervene to help British Energy it could have another Railtrack (a state company that was privatised, its shares sold to the general public, then spectacularly failed) on its hands.
On 9 September the government stepped in to provide some short-term financial assistance in the form of a loan up to £410 million to cover business operations. This action resulted from British Energy's asking the stock exchange to suspend its shares after market-closing on 5 September, owing to fears of insolvency, and directly approaching the government for financial assistance. The terms of the loan are unlikely to inject much market confidence in British Energy as the loan was only until 27 September and at the time of writing no decision had been made for longer-term assistance. In essence the government gave British Energy just 18 days to come up with a restructuring plan.
British Energy's problems stem from it's having to shut down its reactors at Torness and Dungeness. Not only does the company lose money while the plant is off-line but it also has to purchase wholesale electricity to meet its supply obligations. The impact of the closures started a bear run on its share price which has been as low as 12 pence, compared to £3.36 last September and a high of £7.00 just four years ago. Ironically, when BE was forced to enter the wholesale market its misfortunes benefited others and the forward electricity market saw its first price gains in over a month.
The bottom line, according to analysts, is that British Energy will need to provide £450m over the next year to remain financially viable. Last year the company lost £493m before tax, of which £300m was attributed to NETA write-downs. In the current wholesale electricity market the company is losing around £5/MWh based on a marginal generation cost of around £21/MWh. BE's credit rating of Baa2 by Moody's Investor Services is just two notches off junk status, and if it is downgraded to junk status its counterparts could invoke the material adverse charge clause in the balancing and settlement code and re-negotiate electricity contracts in their favour.
The company believes it is being unfairly penalised on its rates bill. It pays £14 000/month compared to £9500/month for gas and coal-fired plant and £3 000/month for the old Magnox plant, and believes it should be exempt from the climate change levy. Prior to the current share price fall the company had also asked the government to assume its pre-privatisation liabilities. The government's response was to the effect that British Energy is a private company in a competitive market and must therefore fail or succeed on its own merits, a response as valid now as it was then.
The government is rumoured to be considering changes to NETA following the eventual publication of its energy White Paper. And it is this that has caused the row with Ofgem, which is opposed to NETA changes that may increase electricity prices.
The real issue on NETA is - has it directly contributed to British Energy's current problems? The answer is both yes and no. Yes, falling wholesale prices under NETA have eroded the company's generation margin but other generators have not suffered to the same extent. It would be wrong to amend NETA simply because of one company's financial woes. To state, as one UK newspaper did, that 'NETA is riddled with problems' is an exaggeration.
While the government was responsible for setting out the trading rules for the market it is the companies that participate within it that are responsible for their own success or failure. Regardless of the perceived unfairness of British Energy's tax rate and its inclusion in the CCL the company has to operate within the set market parameters. Other companies do.
Central to British Energy's problems is its lack of a supply business, and this is solely the responsibility of the company's management. Its generation competitors are vertically integrated with supply businesses, providing a direct outlet for generation output. These competitors are seeing their generation margins squeezed but are making good margins on the supply business, particularly in the domestic household sector. British Energy, by comparison, has to sell the majority of its output to the open market where the price has fallen over 20 per cent under NETA.
Changing NETA to limit or reverse falling prices would ultimately be of little value to British Energy if it cannot efficiently manage its business in a competitive environment. What BE needs more than government help is some self-help.
Nuclear common sense
Where the UK government has been remiss on its handling of British Energy is in its opaqueness on the nuclear issue. The PIU Energy Review, published in February, provided sparse clarification on the government's nuclear position. The market will now have to wait until the publication of the government's energy White Paper, due by the end of the year. Consultation on energy policy in advance of the White Paper ends this month and is likely to include a significant contribution from the nuclear lobby.
Although some EU countries, notably Sweden and Germany, intend to phase-out nuclear power, others remain committed to its development. France and Finland are both expected to approve investment in new generation nuclear plant. The French government is wholly supportive of nuclear power, not surprising considering it provides over 75 per cent of French electricity, but it is also minded of its environmental obligations. To pacify Greenpeace the French government is expected to mitigate its opposition to new nuclear plant by simultaneously putting out a tender for offshore wind farms and/or orders for new clean coal plant. From a French perspective this is investment in sustainable energy and reduced emissions. The UK government could also seek guidance on the nuclear issue through the comforting words of US energy secretary Spencer Abraham who has been quoted as saying: "Forcefully declaring that nuclear power should be part of the world's fuel mix took some people by surprise, but to us it was just common sense."
The UK's energy White Paper will be based on the need to address security of supply and sustainable energy development. Organisations such as the UK Electricity Association strongly believe that central to security of supply is supply diversity. Nuclear power adds to the diversity, and thereby security, of UK supply. If nuclear power is common sense then maybe the government should apply some of this to its White Paper.
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