Power company crisis puts nuclear future in doubt

British Energy’s financial crisis highlights the problems facing the electricity industry – and raises question marks over the future of nuclear power in the UK.

At the heart of the problem is a massive slump in electricity prices, which has meant generators struggle to make money in Britain.

Prices have fallen 40% in the last four years, partly due to overcapacity in the generation market and greater competition, as well as the introduction of the New Electricity Trading Arrangements (NETA) last year.

Analysts say loss-making British Energy is in a worse position than its rivals.

Other companies, such as Scottish Power, Scottish & Southern, Innogy and PowerGen, have a retail customer base, which gives them the benefit of a hedge against falling prices.

British Energy sells straight into the market to industrial customers and is more exposed.

It also faces higher bills because it is a nuclear generator – the company is charged twice as much on its local authority rates as non-nuclear electricity generators.

In addition, a number of other firms are more diversified, with a larger proportion of their operations overseas or more businesses in different sectors.

And other issues are specific to the company. British Energy has faced problems at its plants – it was forced to shut down its Torness station in Scotland last month as a result of technical problems. That move sent its share price plummeting.

So what are the solutions?

The problem of British Energy’s future has now been handed squarely to the government – and observers say the last thing the government will want to do is re-nationalise.

Analysts agree that ministers will not let British Energy close down – the group supplies a fifth of the UK’s energy and lights cannot be allowed to go out.

“With 20% of the UK’s electricity, something has to happen. It can’t be left. Nobody’s going to turn the lights out,” said Andrew Fisher, analyst at fund manager Gerrard.

Angelos Anastasiou, utilities analyst at Williams de Broe, agreed it was inconceivable.

“If it stopped generation, prices would shoot up and we would probably have some lights out,” he said.

“I think British Energy one way or another will be rescued. There is quite a lot of capacity for the Government to do this without having to dig directly into its pockets.”

In the short term, the Government could help the company get through its immediate crisis by relaxing some charges and reducing British Energy’s outgoings.

The company could be excluded from the climate change levy, which could save it £80m.

Nuclear power could also be treated as a renewable energy source – which would allow the company to charge more for its electricity.

Or it could have its local authority rates reduced, saving £30m.

Other options could be brokering a settlement in the dispute between British Energy and state-owned BNFL. A deal between the two could save British Energy up to £250m a year by storing its spent fuel instead of reprocessing it.

It could also receive a fee by taking over the running of BNFL’s Magnox nuclear power stations.

But these are immediate solutions and do not tackle the longer-term question marks hanging over nuclear energy in Britain.

The UK faces the problem of how to replace its ageing nuclear stations, of which all but one are due to close by 2023.

But analysts say the UK simply does not have enough spare generation to make up for a fifth of its electricity supply to be switched off and nuclear power does have a future here.

Mr Fisher said: “We haven’t got the generation to replace that 20% and let’s not forget we have got certain environment targets. If we replace it with fossil fuels, it has environmental implications.”