Andrew Callus
Planet Ark/Reuters News Service
November 4, 2002

LONDON — The U.K. government was considering this week whether to extend its emergency loan to stricken nuclear firm British Energy for a second time as a four-week countdown began to deciding the company’s future.

A 650 million-pound ($1.02 billion) state-bailout loan to the producer of a fifth of Britain’s power is due to expire on November 29.

Privatised British Energy cannot make money at current electricity prices, which have dropped below its cost of production after market reforms exposed industry overcapacity.

Other British power generators are in financial trouble too, but ministers happy to let market forces do their work elsewhere have acknowledged that they cannot walk away from British Energy for reasons of safety and security of supply.

Forcing the firm into administration and potential insolvency by withdrawing support at the end of this month will not make the problem go away. Analysts said it could prove even costlier in the long run because the state’s own loss-making nuclear fuels arm BNFL depends on British Energy.

But propping it up indefinitely with taxpayers’ money is not an easy option either. EU rules against state subsidy are getting stricter and other power producers would have a case for subsidy as well. Meanwhile environmentalists and supporters of renewable energy who want to phase out nuclear power are planning court action against the current loan.

"They (the government) just don’t want this thing on their balance sheet," said a senior industry executive involved in wide-ranging talks about the future of the UK’s power industry.

"Next year’s energy policy review is the key to resolving this whole thing. A debt rollover until the government is clear about where this (policy) is going is where I think things are heading."

A source close to the government said a decision on whether to roll over the loan – extended and increased once already in September – would be taken "very close indeed to November 29".

Ministerial minds have not been made up, he said. "But if there is an extension on November 29 the decision will have been taken that British Energy should survive."

Capacity payments

According to the industry source, one likely change to energy legislation next year that could alleviate British Energy’s difficulties is a return to "capacity payments" – where wholesale power prices include a fee paid to generators for making capacity available.

Capacity payments were abolished with the reforms that introduced New Electricity Arrangements (NETA) last year.

Although regulator Ofgem and many customers are happy with the 40 percent slide in wholesale prices since 1998, generating firms say a power market needs spare capacity, and that there is no longer any incentive to own capacity that is not in use.

They say the situation could end in a capacity shortage. Capacity payment would apply to all types of power producer, so discrimination in favour of nuclear energy would not be an issue.

Another key element to the British Energy puzzle is the future of BNFL, whose contract to recycle fuel costs British Energy 300 million pounds ($469 million) a year.

One neat way to cut the cost of that contract might involve BNFL, which has its own privatisation plans, taking an equity stake in British Energy, possibly swapped for easier contract terms.

Sources have said this is also among the ideas on the table in ongoing talks between industry and government.

Industry sources said Chancellor of the Exchequer Gordon Brown, who runs the nation’s finances, will have the final say on November 29 even though the Department of Trade and Industry (DTI) is officially in charge.

The DTI said talks were continuing, and the Treasury said British Energy was a matter for the DTI.