Financial crisis hits UK nuclear generator

Below is a summary of the news items the N-Base Briefings have carried about the crisis which has hit UK nuclear generator British Energy. The stories start in august 2002 and go up to the end of October 2002.

17th August 2002 - The crisis starts

Reactor One at Torness in south-east Scotland was closed this week due to vibrations in its gas cooling system. Torness' second reactor has been closed since May following a failure in its cooling system. The closure of the second reactor at Torness is estimated to cost the company GBP250,000 a day. The news of the shutdown caused a flurry of media and City speculation on the financial consequences for British Energy, whose shares almost immediately plunged by 30 per cent. The company predicted that its output in 2002 was likely to be five per cent lower than forecast.

There is also concern over the company because of the drop in market value, the drop in income, and the drop in the value of the special 'segregated fund' it has to cover decommissioning costs due to the Stock Market collapse.To make matters even worse for British Energy the Dungeness B power station in Kent is closing for refuelling.

Lightning move

British Energy is considering legal moves for compensation against ScottishPower following the lightning strike which forced a five day shutdown of the Torness reactor in May - costing the nuclear generators hundreds of thousands in lost revenue.

Wilson supports rates demands

British Energy has gone to the European Commission in its battle to reduce its rates bill. BE has asked competition commissioner, Mario Monti, to investigate why nuclear power stations pay much higher rates than coal or gas plants whose bills are about a third lower. Nuclear power pays GBP14,000 per megawatts capacity while gas and coal pays GBP9,500.

BE says this is an 'unfair economic penalty we can't afford'. Official responses point to the much higher value of a nuclear reactor compared with other power sources, but energy minister Brian Wilson, a long-time supporter of nuclear power and who has the Hunterston reactor in his constituency, this week commented: 'There are historical reasons for the rating regime as it relates to new power stations. but it is the government's view that it should be brought up to date.'

1st September 2002 - Quick collapse

The UK Government is desperately looking for solutions to the problems of British Energy. These include a 30 per cent reduction in electricity prices in England and Wales, risings costs, reduced income because of reactor closures and a collapse in its share prices. The nuclear generator is in danger of going bust.

The company has debts or losses of at least GBP450 million and is losing GBP4 on every megawatt hour of electricity it sells. There is a grave danger the company might collapse, just eight years after it was privatised. Assuming the Government finds this unacceptable, it has to try and find a solution quickly. The problems for the nuclear industry have similarities with the crisis which hit Railtrack and the railways, forcing the government effectively to re-nationalise the company by putting it into liquidation and then forming a non-profit making company to take over its responsibilities.

The future of British Energy has been the subject of intense speculation over the past two weeks and this will continue as the energy minister Brian Wilson and the rest of the Government try to find a solution.

Mr Wilson has suggested changing the 18-month-old New Electricity Trading Arrangements (NETA), the new market regulation which made electricity generation more competitive and resulted in the lower bulk prices. However energy regulator Callum McCarthy has stepped-in and said the Government cannot change the wholesale energy market just to save one company. Mr McCarthy said NETA did not "artificially bring down prices. It produces the lower prices you would expect in a competitive market." NETA does not apply in Scotland. Changes there are due in 2004 when the British Electricity Trading Arrangement (BETA) comes into force.

Other options being considered by the company and the Government include trying to get Treasury approval to exempt the nuclear industry from the carbon tax, which could save it GBP80 million a year, and reducing its local rates bill, which British Energy says would save a further GBP25 million a year.

There is also the company's reprocessing contracts with British Nuclear Fuels at Sellafield. These cost BE about GBP300 million a year and the company has been trying either to reduce these costs, or cancel the contracts altogether for several years. without reprocessing costs it is estimated BE could make money on generation.

British Energy says there is no need to reprocess its spent fuel. However, while cancelling these contracts might be good news for British Energy, it would undermine and seriously damage Sellafield's reprocessing industry. To complicate matters further, the Government is in the process of setting up the Liabilities Management Authority (LMA) later this year which is due to take over responsibility for the reprocessing plants at Sellafield - and the four ageing Magnox reactors presently operated by BNFL.

Withdrawing its traditional blind loyalty to Sellafield and reprocessing might be the price the Government has to pay to save British Energy.

Another possibility being touted around is the idea of British Energy taking over the remaining four Magnox reactors which BNFL presently operates. The two companies have been discussing this idea for a number of months without any resolution. The proposal would give BE some desperately needed cash income - as would the sale of its 50 per cent holding in its American joint venture company AmerGen. However BNFL is understood to feel nothing can happen until the new LMA is set-up, or at least the legislation to establish it has been published, as the new authority will take over ownership of the reactors.

7th September 2002 - British Energy desperately looks for help

The UK nuclear generator, British Energy, has a vision statement: 'to be the world's leading nuclear energy company' and only a matter of weeks ago its chairman Robin Jeffrey was saying the company's future was bright. Now, shares in the company have been suspended and without substantial government help it faces insolvency. Urgent talks are taking place between Government departments, bankers and British Nuclear Fuels to try and fine a solution which provides short-term cash and longer-term stability - and a solution which is acceptable to the European Commission. The bankers, Credit Suisse First Boston, have been appointed to advise the Department of Trade and Industry.

The reasons for the collapse, which is highly embarrassing to a Government believed to be preparing the way to the building of new reactors in the UK, are complex - but come down to a few simple facts: nuclear power is too expensive to produce and its liabilities and waste costs are too high.

British Energy lost about GBP500 million last year and was losing GBP4-5 on every megawatt hour (MWh) because market competition under the New Electricity Trading Arrangements (NETA) has forced down prices. In 1996 the company received GBP27 MWh but by the end of last month this had dropped to GBP16.

Ironically, the problems with the company, which generates about 25 per cent of the UK electricity supply, has resulted in electricity prices in England and Wales jumping back up to GBP25 MWh by the end of the week.

The company needs GBP450 million to cover repayments on its GBP1 billion borrowings and other costs. Its present market value when its shares were suspended this week was GBP500 million and it is losing GBP500,000 a day in revenue from the closure of its four reactors at Torness and Dungeness. It needs to find GBP450-500 million within about six months to meet its loan and bond commitments as well as improving its revenue and reducing costs.

Among the issues which would help the company in the longer term is cancelling the spent fuel reprocessing contracts with British Nuclear Fuel at Sellafield. This would save at least GBP250 million a year. BE has been saying for several years reprocessing is unnecessary and costly and it would prefer to store its spent fuel. But BNFL needs the BE contracts for its THORP reprocessing plant.

It will need a highly significant change in Government policy for the DTI to agree that spent fuel can be stored, instead of insisting it be reprocessed. This would be a severe blow to BNFL reprocessing business - perhaps softened by the fact the new publicly-owned Liabilities Management Authority is due to take over the reprocessing business probably next year.

15th September 2002 - British Energy - the crisis deepens

UK nuclear generator British Energy was kept alive this week when the Government agreed emergency credit of GBP410 million just to keep the company running. But this deal only lasts until 27th September by which time some longer-term solution to the company's financial collapse has to be found, otherwise administration, liquidation and even greater embarrassment is virtually inevitable. Once in liquidation all its existing power supply contracts would be nullified and its output traded at current market prices - which are low enough to lose it an additional GBP100 million a year.

The problems facing the Treasury and Department of Trade and Industry are highly complex and it is hard to see any outcome other than re-nationalisation, although the rescue package will try to avoid admitting this too clearly. In the Railtrack rescue, which the BE saga shares many similarities, the Government allowed the company to go into liquidation and then took over the company as a non-profit making concern.

Despite the complexity, the fundamental problems are simple: the UK produces more energy than it needs; nuclear energy is too expensive, it is losing money on every unit it generates; and its waste and decommissioning costs are too high.

EU competition commissioner Mario Monti said the commission would 'assess the compatibility of this state intervention under the admissibility criteria for rescue aid'. Any long-term package would also have to meet EU rules on subsidies and state intervention.

Yet another complication are the other national and international electricity generators, who use coal, oil or gas, as well as heavy users of power from industry, who are making strong representations to Government against any special treatment for BE which might artificially change the cost of electricity or give the nuclear generator some financial advantage.

As well as trying to keep the company afloat, Ministers are understood to be furious the collapse happened so quickly and without warning. Financial advisers have been sent in to try and find out what went wrong. One Government source commented: 'There are lawyers crawling all over the place'. Accountants Deloitte have been sent into the company's headquarters and have to approve every single payment.

The long-term problems of the company are shown in its liabilities of at least GBP14 billion when it only has around GBP300 million invested in its decommissioning fund. About GBP5 billion of its liabilities are to cover the cost of reprocessing spent fuel from its reactors until they are all shutdown by 2010 under the present plan - except Sizewell which is due to close in 2035. These reprocessing costs show why BE has been trying for years to be allowed to get out of reprocessing contracts in favour of storing the used fuel.

It is thought BNFL has offered to reduce the annual reprocessing bill by GBP70 million to GBP230 million, but this is effectively a Government subsidy if agreed and would need EU approval. Also BNFL is reluctant because it undermines its economic case for reprocessing.

The financial world's credit rating agencies cut British Energy's rating to 'junk' grading last week. The rating means the company's rating is regarded as so low no-one will lend it money or extend credit - without Government guarantees. The speed of the collapse is reflected in the fact the company was given solid investment grading only three weeks ago.

British energy is trying urgently to get a separate credit rating in Canada where it has an 80 per cent stake in the Bruce Power nuclear generating company in Ontario. Under Canadian licence rules BE must be able to provide guarantees of $144 million to meet potential costs of an emergency shutdown. The Canadian Nuclear Safety Commission has given the company some time to solve the problem after BE director Duncan Hawthorne held talks with banks in Canada and reminded the commission of the reactor's good operating record.

21st September 2002 - British Energy's fight for survival

Hundreds of column inches in national newspapers over the past week have covered the changing and twisting story of nuclear generator British Energy's fight for survival. There have been media briefings by all involved - both the company and the Government, and within the Government by the different departments involved in trying to find a solution. One story was the Government was going to push the company into administration - while another suggested the Government may convert its loan to shares and take a majority holding in restructured BE.

A number of the BE shareholders are understood to support a restructing of the company - preferring it to administration. This week one of the world's largest fund managers, Fidelity International, announced it had bought 9.19 per cent of the BE shares. This increased speculation that overseas investors might be interested in taking over all or parts of BE. One suggestion is that Berkshire Hathaway, owned by American billionaire Warren Buffett, might be interested in British Energy. It already owns two UK electricity distribution companies, Northern Electric and Yorkshire. One argument is that if British Energy had such a customer base to sell electricity to, as well as generating it, then it would be much more viable and attractive to investors.

BE is expected to ask for an extension of the emergency GBP410 million Government loan facility to give longer to find a long-term solution. The Government has set a deadline of Friday 27th September for the loan.

Reactor shut

Yet another of British Energy's reactors was shutdown this week adding to the company's troubles. The Heysham 2 reactor in Lancashire automatically shutdown on Wednesday after what the company called 'a minor electrical fault'.

Let BE go says SERA

British Energy should be allowed to go into administration according to the environment group SERA, which is affiliated to the Labour Party and has over 100 of the party's MPs in its membership. In a letter to trade and industry minister Patricia Hewitt SERA argues that: BE should sell-off its American and Canadian reactors; the eight UK power stations should be handed over to the new Liabilities Management Authority; the company's reprocessing contracts at Sellafield should be cancelled; and nuclear power should be phased-out.

Legal challenge

Greenpeace and a renewable energy provider, Ecotricity, have threaten legal action against the UK Government because they believe the GBP410 million loan to British Energy was illegal. The two groups argue that prior approval of the European Commission was needed before any such loan was made.

Coal's cry for help

RJB Mining, which runs the UK's 12 underground and 13 surface coal mines has called on the Government to provide assistance to prevent even more closures than already expected later this year. The company blames cheap imports and the cheaper price for electricity under the NETA arrangements which have also contributed to British Energy's problems. The calls for financial support from the coal industry will be harder for the government to ignore with aid being pumped into the nuclear industry.

28th September 2002 - Loan extended and more money

The UK Government's emergency loan aid to British Energy was this week increased by GBP240 million to GBP650m and extended by two months to 29th November. The Government said the loan was secured against the company's main assets - nuclear reactor sites. Talks are continuing trying to find a long-term solution to the company's problems.

Public ownership call

Industry union, the GMB, has called on the Government to take British Energy back into public ownership. GMB national officer Brian Stretton said: "The only logical way to stop having to bail out British Energy is to bring it back into public ownership and stop these short-term bailouts."

BNFL stake ?

It has emerged that one part of the eventual rescue package for British Energy could involve British Nuclear Fuels taking a stake in the company. This would be in return for BNFL agreeing to reduce BE's reprocessing costs at Sellafield.

EC investigation ?

EU competition commissioner Mario Monti says his office will decide in the next few days whether or not to order an official investigation into the aid to British Energy. Non-nuclear pwoer generating companies in the UK have complained that the aid is unfair and uncompetitive.

5th October 2002 - A quiet week

It has been a fairly quiet week for troubled nuclear generator British Energy.

The US owners of the huge Drax coal-fired power station in Yorkshire, AES, are considering a legal challenge to the Government over its GBP650 million loan facility to BE. AES and other major generating companies in the UK say this is unfair competition and could have serious long-term consequences for the power supply industry in the UK.

The Belgium Government has also complained to the European Commission that the loan amounted to unfair state subsidy and broke competition regulations. Belgium is annoyed the UK may be allowed to give the support when the Commission banned it from giving financial help last year to the airline Sabena which later went bankrupt. There have also been suggestions this week the UK Government will propose major changes to the energy markets in its White Paper on energy expected next year. The NETA market agreement has been blamed as one of the reasons for BE's problems as it has forced down electricity prices below the cost of nuclear generation.

12th October 2002 - Tax avoidance less likely

It seems as if the Government is likely to resist calls to exempt nuclear power from the climate change levy on electricity generation. In a letter to non-nuclear generators the trade and industry secretary, Patricia Hewitt, said the Government "has no plans to exempt British Energy, or any other nuclear-generated electricity, from the climate change levy."

Ms Hewitt said the levy 'is not a carbon tax. It has been design as a downstream energy tax to encourage all sectors of business and the public sector to improve energy efficiency. Excluding electricity generated from nuclear would take a fifth of the UK's electricity out of the levy, reducing the incentive on business to use electricity efficiently and reducing the levy's beneficial effects on carbon emissions.'