British Energy: Generating a crisis

British Energy needs a quick solution to avoid insolvency

British Energy has called for government help to ease its financial crisis and stop the company going into administration.

While the government has said it will not write a "blank cheque" nuclear energy accounts for about 25% of Britain's power, and BE is the largest provider, accounting for about 20%.

The country cannot afford to be without its supply.

The question is how British Energy reached such a state and where it goes from here.

A private business

British Energy was privatised in 1996, raising £2.1bn for the government - less than the £2.6bn it had originally hoped to receive.

British Energy took on the operation of eight power stations in the UK while a group of older power stations that the government couldn't sell, the Magnox plants, were put into a company called Magnox Electric.

Wholesale electricity prices are now at an all-time low in the UK

This later merged with the government-run firm British Nuclear Fuels (BNFL).

One of British Energy's key gripes is over an expensive waste reprocessing deal with BNFL, agreed prior to privatisation.

BE says the price it pays for this, £300m, is too high yet it has failed to agree a new price with BNFL despite ongoing negotiations.

Over-paying?

There are three other key issues which British Energy says have contributed to its collapse: changes to wholesale electricity prices, the hefty climate change levy and business rates.

Wholesale electricity prices have dropped sharply

Wholesale electricity prices are now at an all-time low in the UK, following the introduction of New Electricity Trading Arrangements (Netas) in March 2001.

This created competition between suppliers and brought down prices - three years ago, wholesale electricity cost three pence per kilowatt hour, now it costs just two pence.

But unlike rival operators, BE has no retail operations to offset the shortfall.

Climate change levy dispute

At the same time, an estimated 30% overcapacity in electricity generation is a further blow for BE.

Again unlike other electricity generators, nuclear stations cannot alter their output when production is low, so costs remain high.

Then there is the climate change levy, a charge on the energy generated by stations that emit carbon dioxide.

BE has been required to pay £80m a year for this. But the company, backed by the shadow trade and industry secretary Tim Yeo, says it should be exempt from this as it doesn't produce any carbon dioxide.

The nuclear giant is also calling for the business rates on its nuclear sites to be reduced, as they are 50% higher than those charged for gas and coal-fired power stations.

Frying pan to fire

Amid all the ongoing cost issues, BE was forced to shut down two of its plants in August, which exacerbated the problems by forcing it to cut output targets for the year.

There is also criticism over its decommissioning fund.

This was set up to cover the cost of decommissioning reactors when they start closing, which is expected to be in about 15 years time.

But BE invested its money in shares and has seen the value of its savings plummet as stock markets tumbled.

What happens now?

British Energy now says it needs bailout funds just to see its way to the end of 2002.

Britain would be better without BE's creaking nuclear power stations

Greenpeace

It reported a loss of £518m last year, has debts of £460m and two £100m bonds due for repayment by the end of the year.

In the short term, there are suggestions that the government could loan funds to the company, or even allow it to go into insolvency and then take over the running of the plants itself.

Another possibility is selling some of the group's profitable US operations.

BE has already said it is in talks about selling Amergen, its joint venture with Exelon that has an estimated value of £200m-300m.

The company is also in discussions with BNFL about running the six Magnox plants, which would provide it with a welcome management fee.

Longer term options rest on an exemption from the climate change levy and cutting waste disposal charges.

British Energy has submitted a consultation document to the government's energy review but says it is still waiting for decisions.

Scrap the industry?

More extreme critics would argue in favour of letting British Energy collapse.

Greenpeace and Friends of the Earth have said BE's situation highlights problems with the industry as a whole - that it is unreliable and uneconomic.

Greenpeace said on Friday: "Britain would be better without BE's creaking nuclear power stations."