Nuclear meltdown

Tom Adams
National Post
August 16, 2002

The meltdown in the stock price of British Energy – down 92% from its peak – demonstrates that nuclear power is not remotely economic.

Here is a corporation – the world’s only listed nuclear generating company operating in a competitive arena – that seemingly has everything going for it, most recently a windfall in Ontario, where it leases eight Candu reactors.

And still this company’s stock performs more like a vanishing dot-com than the asset-rich, low-debt company that it is.

When Margaret Thatcher privatized the U.K.’s electric power sector in 1990, she created close to 20 power companies where one had stood. British Energy, formed in 1996 by investors who cherry-picked the best of the government’s nuclear assets, is the one economic catastrophe among them.

In the privatization, British Energy acquired 15 reactors, including the spanking new Sizewell B, the country’s most advanced reactor. For this impressive fleet – the 9,600 megawatts of nuclear capacity it acquired then exceeds the entire nuclear fleet operating in Ontario today – the company paid just half the cost of constructing Sizewell B alone. Not a bad start in life.

British Energy also benefitted from massive insurance subsidies in the form of legislation that absolves it of financial responsibility. In the U.K. and Canada, the company and its suppliers enjoy almost complete legal exemption from third-party liability in the event of a serious reactor accident. In the United States, where British Energy has a stake in three states, its third-party liabilities are also capped by law, albeit at a higher level than in Canada and the U.K.

British Energy – known for its solid management, strong work force, and good industrial worker safety record – performed superbly, astounding the energy world with the improvements that it squeezed out of its fleet. The company has consistently increased production from its nuclear units – a total of over 10% from 1996 to the present. Meanwhile, it lowered its costs from those same 15 reactors by a full 30%.

But the 30% wasn’t enough to overcome nuclear power’s inability to compete in a free-market environment. Nuclear power’s operating costs remained high relative to its competitors, particularly high-efficiency gas generation, which has driven down the cost of power to levels that eroded profits from British Energy’s nuclear plants.

Neither can it count on Ontario to remain a money machine. When British Energy first acquired its stake in the Ontario reactors, in July, 2000, it only expected to reap high revenues for a few months, until Ontario’s power sector was scheduled to become competitive. But Ontario’s then premier Mike Harris delayed the market opening until May of 2002, allowing British Energy to charge monopoly prices for another year.

The upshot of all these events has been a five-year profit slide. For the year ending in March, 2002, the company declared a loss of £527-million (about $1.2-billion). Early euphoria over the company’s prospects had led to a run-up in the stock price, from 105 pence per share at its launch to 749 pence per share in early 1999. Then reality set in, and the stock began to tumble. Starting this May, fresh operational problems at three reactors in the U.K. and one in Ontario further weakened investor confidence. The stock ended the day yesterday at 60 p/share. In the last year, British Energy’s stock declined by 78%, compared to 23% for the broader Financial Times index.

British Energy’s nuclear assets, when they were owned by the U.K. government, were valued at over £10-billion ($24-billion). British Energy’s current market capitalization is a mere £366-million ($880-million), and that includes stakes in 11 North American nuclear reactors.

British Energy’s response to its declining fortunes has been to ask for government aid. Last November, the company told the U.K. government that “New nuclear is uneconomic against gas-fired combined cycle plants in the present and foreseeable U.K. market.” The outlook for British Energy, and the U.K. nuclear industry, was glum, it explained. Most of its U.K. generators have graphite reactor cores that deteriorate with use, putting a finite limit on reactor life. Worried about the implications of being nothing more than a custodian for a dwindling rump of unwanted assets but also mindful that without protection from market forces new nuclear investment is impossible, the company began lobbying for fresh government subsidies to fuel another round of nuclear expansion.

For example, British Energy wants the government to force U.K. electricity customers to take 25% of their power from nuclear sources, and it wants taxpayers to take on various costs, including liabilities for radioactive waste. It also wants relief from business and production taxes. And it claims environmental benefits – such as an absence of greenhouse gases – as a rationale for government aid.

At the end of the day, the U.K.’s privately owned nuclear company is behaving much as its publicly owned predecessor did – asking for bailouts while producing high-cost power. When it was a government-run enterprise, politicians repeatedly complied, largely because the state-run utility managed to convince the politicians that nuclear power was economical. Now the chance of a government rescue, and the bankrolling of a new generation of reactors, is remote. The marketplace has pronounced on the economic viability of nuclear power.

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