Analysis: British Energy Has Come Back From the Brink, but How Long Will the Nuclear Frisson Last?
Jun 20 - Independent on Sunday, The
In a City office overlooking the Thames last week, one of British Energy's advisers turned to a colleague and asked with a smile on his face: "Would you ever lend British Energy money?" The answer was a firm "no". But then again, the adviser wouldn't even have raised the issue 18 months ago, for fear of being laughed out of the office.
The word from Brussels is that the European Commission will approve the
pounds 5bn rescue package, although the decision will be delayed until the
autumn. This is crucial, as without it, the Government will withdraw its
support.
However, there are still some large question marks hanging over the company's
future.
Why did it all go wrong?
Plunging wholesale electricity prices meant British Energy was losing
hundreds of millions of pounds a year. It also had more than pounds 3.5bn of
decommissioning liabilities on its balance sheet that it could not afford. In
September 2002, the Government stepped in to rescue it.
It lent British Energy pounds 650m and set up a nuclear liabilities fund
which will assume all its decommissioning costs. In return, the company must pay
65 per cent of its free cash flow into the fund.
The Government also cut the value of British Energy's compulsory reprocessing
contracts with the state-owned British Nuclear Fuels.
Can it survive without state aid?
Probably not. The setting up of the liabilities fund takes a big burden off
its balance sheet.
Brian Wilson MP, the energy minister at the time of the rescue, agrees that,
as a result, its survival is more likely. "Nuclear companies must be
expected to carry their current operating costs. But the fact it was carrying
its liabilities contributed to its difficulties."
Now that electricity prices are rising, the company is turning in an
operating profit again. Daniel Norton, an analyst at energy consultancy EIC,
says that electricity prices should increase by another 20 per cent over the
next two to three years, making capital investment in the power industry
economically viable.
Because reactors do not emit carbons, nuclear has a big advantage over
alternative methods of generation. The Government is introducing environmental
regulations, such as carbon trading, which make power stations fired by coal,
gas and oil more expensive to operate and nuclear reactors more competitive.
Do we need British Energy?
Yes. The company provides just under a fifth of the UK's electricity. It owns
eight nuclear power stations and one coal- fired plant. The combined output of
all these stations is 11,600 megawatts - or enough to provide electricity for 11
million people.
The Government knows that, like the railways, British Energy cannot be
allowed to fail. Without the electricity it provides, the lights would go out.
The question of what to do with its nuclear reactors would also not be solved.
A spokesman for the Department of Trade and Industry admits: "The
Government stepped in because of the safety and security of supply issues. We
thought it was right to give the company the chance to come up with a
restructuring plan."
Someone still needs to operate the reactors. Because there is only limited
nuclear technical expertise in the UK, if British Energy disappeared, the same
people would just do the same job for a different company. American nuclear
companies, or the continental nuclear operator Electricite de France, could run
the stations instead, although they operate different kinds of reactors to the
British Energy fleet. And politically, it might not be acceptable for foreign
companies to run UK power stations.
Can a nuclear firm go it alone?
Yes, nuclear companies can not only stand on their own two feet financially,
but operate as successful businesses - only within the right framework, however.
The privatised nuclear industry in America, which also provides around a fifth
of US electricity, is run profitably without government support.
Nuclear waste is not reprocessed but stored, which cuts costs. This approach
is financed by charging 0.1 cents for every kilowatt per hour of electricity
used, and placing these proceeds in an industry-wide fund. Around $750m (pounds
410m) a year is put aside for storing waste and so far more than $18bn has been
saved.
Federal law obliges nuclear companies to estimate the costs of
decommissioning reactors. The operators must then make annual contributions into
a trust fund in order to cover this. The US Congress found that, in 2000, the
total amount set aside for decommissioning was $26.9bn - some 47 per cent
over-funded.
In Europe, Finland provides an innovative solution for overcoming the costs
of building a nuclear power plant free from government handouts. A coalition of
around 60 Finnish companies, including heavy power users in the pulp and paper
industry, recently formed a group called TVO. This agreed to fund 25 per cent of
the start-up costs of a station. TVO's shareholders will also purchase the power
from the 1600mw plant, guaranteeing its cash flow.
However, not everyone agrees that nuclear companies can survive on a
standalone basis.
Mark Johnston, a campaigner at Friends of the Earth, says: "Without
state support via grants, guarantees or other subsidies, nuclear is
fundamentally incompatible with a market-based approach."
What is British Energy's future?
For the company to survive in the long term, the Government must agree to
build more nuclear power stations. Most of British Energy's reactors will be
decommissioned within 10 years. As they are phased out, so its source of revenue
will shrink. Yet its costs will remain high, as the company will still have to
spend millions of pounds on research and development and safety tests for the
remaining reactors - to make sure they comply with regulations. Because no one
else in the world operates its main type of reactor, it must do all this work
itself.
And, as nuclear consultant John Large points out: "The reactors get more
expensive and less efficient as they get older."
British Energy's fate, therefore, is tied to the wider debate about nuclear
power. Last year's energy White Paper favoured renewable forms of generation,
such as wind, over nuclear generation. But growing concern about climate change,
and the polluting effect of conventional power stations, is forcing a rethink,
even within the green lobby.
Dr Tim Lenton, earth system modeller at the Centre for Ecology and Hydrology,
says: "I would take the modest dangers and risks associated with nuclear
power generation over the much larger ones associated with climate change. I
would pursue the nuclear option because I would consider nuclear as the lesser
of evils by a long way."
The Government has set tough targets aimed at cutting carbon emissions, which
cannot be met without carbon- free nuclear generation.
Mr Wilson says: "Public opinion and environmental thinking will lead
government rather than the other way around. The more permanent carbon emissions
reduction is, the more out of balance it is to get rid of nuclear." The
nuclear industry also argues that new technologies means waste is cut to a
minimum.
The alternative is renewable energy. The Government wants to generate a fifth
of all electricity from sources such as wind power by the year 2020, but some
believe that this is not realistic. It is estimated that more than 6,000
turbines would have to be built to meet this figure.
Critics believe that the benefits of renewables have been over- hyped anyway.
Mr Large says: "In the 1950s, the nuclear industry misled the public about
the benefits of nuclear power and how it would solve the world's energy needs.
Now the renewables industry is doing the same."
It is unlikely that British Energy will ever be in a position to build new
nuclear reactors. The likely financial conditions set by the European Commission
will prevent it from investing in non- nuclear businesses, so it will never
become a big energy group like Germany's RWE or Electricite de France, which can
afford to finance their own nuclear reactors.
Shareholders who have lost over 92 per cent of their investment are unlikely
to bankroll a new generation of reactors. Even Mr Wilson admits: "It has to
be a long time before anyone would invest with great confidence in British
Energy."
Like its ageing reactors, British Energy's time is running out, yet nuclear
may yet rise from the ashes.
However, Mike Alexander, the company's chief executive, is optimistic:
"All plant has a limited shelf life - we are no different. If new nuclear
reactors are built, we would like to operate them." For far more extensive news on the energy/power
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