Loss beats profit at BE

3 October 2002

British Energy has blamed BNFL for its current financial crisis, but the nuclear generator's problems are much wider. The high cost and relative inflexibility of nuclear generation and the failure of British Energy's strategy in the tough UK market mean that even if the waste problem were solved the company would still not be financially secure.

The wholesale electricity price in the UK currently stands at £16/MWh. That price is too low for any generator to make a profit unless it also has retail customers, and is able to make back from them what they are losing on generation. Even these companies are finding it hard - International Power recently announced that it would mothball one of its 250MWe combined cycle gas turbines at Deeside. But British Energy's attempts to access the retail market have failed, leaving it with a limited number of large users and the wholesale market to rely on. And New Electricity Trading Arrangements (NETA), unlike the previous electricity "pool", rewards suppliers who can offer flexibility - impossible for a company running more than 10GWe of nuclear plants designed for full power baseload operation.

The pool called on generators to supply every half-hour and paid them all at the price of the highest bidder. That allowed British Energy to offer electricity at zero and be sure it would be called on (intermittent sources like wind turbines took the same approach). But under NETA, suppliers and buyers make bilateral contracts and either side can be penalised if at the time of dispatch they are "out of balance" - using or supplying more or less than their contract. NETA has driven down wholesale prices by nearly 20% since it came into operation in March 2001 and it has left British Energy with nowhere to hide. The drop is estimated to have reduced British Energy's pre-tax profit by some £225 million in FY 2001.

If the price of power in the UK is not going to increase to meet British Energy's needs, what are its options to improve its balance sheet? It has argued that nuclear electricity should not attract the Climate Change Levy. This adds 0.43p/kWh to the price of most electricity for non-domestic users and is intended to convince companies to switch to CO2-free sources. BE argues that since nuclear energy does not emit CO2 it should qualify as exempt - especially since so-called "good quality" CHP schemes, some of them gas-fired, can be exempted. BE estimates that it would be able to increase its income by some £80 million annually if it was exempt.

British Energy has also complained to the European Union that it is taxed at £14,000 per month on its sites, compared to £10,000 for fossil-fired stations and £5000 per month for wind farms. The company says it could save £20 million per year if this distortion were removed.

But these are small sums set against BE's losses. A deal under which British Energy would operate BNFL's Magnox stations for an annual fee, which has been under discussion, is also unlikely to make enough to bring BE back into the black. What really puts it, according to chairman Robin Jeffrey, "between a rock and a hard place" is the cost of dealing with its waste. He has argued that despite the UK's low electricity prices British Energy's UK business would make a profit, if its spent fuel were managed under the US system.

British Energy's spent fuel management arrangements have been under discussion for nearly ten years, since the UK's publicly-owned Central Electricity Generating Board was split into competing companies. British Energy argues now that reprocessing is expensive and unnecessary, that long term storage is secure and offers fewer non-proliferation concerns, and most of all that it is much cheaper - perhaps half the £400 million per year that it spends on reprocessing. But British Energy entered the private sector saddled with long term agreements under which all the spent fuel from its nuclear plants will be reprocessed at Sellafield and years of pressure have not convinced BNFL to cancel the contracts.

Part of the problem may have been BNFL's own shaky financial situation and wavering by successive UK governments over whether it should be a public or private company. In the mid 1990s the aim was to follow successful sell-offs of British Energy and parts of the UK Atomic Energy Authority with disposal of most of BNFL as a nuclear services company. That gave BNFL an incentive to retain its British Energy contracts intact. British Energy has continued to press for change but said in its 9 September announcement that new proposals delivered by BNFL on 8 September "fell short". Some UK commentators speculated that a better deal from BNFL had been vetoed by the Treasury.

Who pays? Although the pressures on British Energy were well known, and reflected in its falling share price, its insolvency warning came as a surprise. BNFL's Norman Askew had been fairly upbeat when talking about its relationship with BE a few days beforehand. Robin Jeffrey had spoken so positively about the company's finance over the summer months, and particularly at an August city briefing, that it has attracted the attention of the Financial Services Authority, which will consider whether British Energy misled investors.

Meanwhile, the failure of its UK arm has caused concern among British Energy's partners overseas. Its US arm, AmerGen, owned jointly with Exelon, was a profit earner last year, bringing in £83 million. Now, however, British Energy confirms that "it is in the preliminary stages of exploring the possibility of a sale of its interest" in the company.

In Canada, too, British Energy's majority-owned subsidiary Bruce Power "performed ahead of expectations" in the last fiscal year, according to British Energy's annual report, and work towards the restart of Bruce A is ahead of schedule. Nevertheless the Canadian Nuclear Safety Commission has asked BE for more confirmation that its perilous UK financial position will not affect its ability to meet Canadian capitalisation requirements.
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