Page last updated at 10:28 GMT, Friday, 1 August 2008 11:28 UK

Q&A: Future of British Energy

Sizewell B nuclear reactor
Building new plants will be a lengthy and expensive process

The UK's future energy policy is in doubt after the planned takeover of nuclear firm British Energy all but collapsed.

The government saw French firm EDF's takeover of British Energy - which runs eight nuclear plants - as a vital step in kickstarting plans to replace its ageing nuclear power capacity.

Ministers see nuclear power as a key part of the UK's future energy mix and crucial in securing its energy security for the next 50 years.

Why is the deal between EDF and British Energy in trouble?

The two firms had been expected to announce on Friday an agreed deal for EDF to buy British Energy for about 12bn.

But, at the eleventh hour, EDF pulled back, saying "conditions were not right" for the deal while British Energy warned a deal may never happen.

The key stumbling block is over price.

EDF offered to pay 765 pence for every British Energy share, an increase on its initial offer of 700p earlier this year.

But two leading British Energy shareholders - British financial firms Invesco and Prudential - think the firm is worth substantially more than that.

They are thought to value the shares at about 10 each, arguing that energy prices are likely to remain at their current high levels over the next few years.

Why is the deal so crucial to the UK's energy supply?

Nuclear power accounts for about 20% of the UK's current energy supply but the country's nuclear infrastructure is fast reaching the end of its natural lifespan.

British Energy sign outside the Sizewell B nuclear reactor
2014: Hartlepool, Heysham 1
2016: Hinkley Point, Hunterston B
2018: Dungeness
2023: Torness, Heysham 2
2035: Sizewell

Most of the UK's nuclear plants are more than 25 years old and some are already showing their age, with enforced shutdowns hitting power output last year.

Under current plans, five of British Energy's eight plants will be permanently taken out of service by 2018, with a further two set to disappear by 2023.

Unless replacements are built in time, there are real concerns that the UK will not have enough energy to meet its needs in 10 years time and that, in the worst-case scenario, "the lights could go out".

Although the government strongly backs building new nuclear plants, it has said that it will not subsidise the building process.

Massive investment is therefore required to ensure the process goes ahead and EDF Energy, which made profits of 4.7bn euros last year, was seen as a partner with big financial muscle.

It built its first nuclear power plant in France in 1977 and has since expanded abroad, building plants in China among other countries.

Would EDF have been the best owner?

Supporters of the deal argue that the complexity and cost involved in building new nuclear plants mean that having a single operator would speed up the process and reduce costs.

But critics argue that the EDF deal would concentrate too much power and influence over the UK's future energy needs in the hands of a foreign state-owned company.

EDF is already a major UK supplier of electricity and gas. Recently there has been criticism of firms that own both the production and supply of energy because of recent sharp rises in household fuel bills.

How has the government reacted?

The apparent collapse of the deal is a real blow to ministers, who are looking to kickstart the new nuclear programme as quickly as possible.

It could also have an impact on government finances if it doesn't receive the billions of pounds it would receive from the deal as a 35% shareholder in British Energy.

The government said it was watching events "closely", stressing that it was up to the companies involved to settle any differences.

Ministers have put a brave face on the situation, arguing that their commitment to future nuclear development is undimmed.

They say their plans are still in the national interest as nuclear is an economically viable and safe way of reducing the UK's carbon emissions, although nuclear critics disagree.

Whatever happens with EDF, the government has stressed that interest within the private sector in building new plants remains "high".

What is likely to happen next?

British Energy has suggested that discussions may not be finished while EDF said it was still keen to invest in the UK's nuclear future.

However, experts point out that the gap between the price offered by EDF and that sought by British Energy shareholders may be too large to bridge.

Should the deal collapse, other suitors could potentially come forward.

British Energy is thought to have talked to other groups such as France's Areva and Suez and Germany's RWE before entering prolonged negotiations with EDF.

One possible scenario is that British Energy could end up negotiating separate deals with different nuclear operators to build individual plants.

British Energy hopes to build new plants on land close to existing and former nuclear sites.

It has not decided where to locate the new plants yet but has identified Sizewell in Suffolk, Dungeness in Kent, Hinkley Point in Somerset and Bradwell in Essex as priority sites.

Taking into account planning, licensing and design hurdles, it hopes to begin development on the first plant in 2013.

However, this is contingent on the funding being available.

The government plans to announce which sites are suitable for development early in 2010.

But given that past reactors have taken a minimum of eight years to build, any uncertainty over the process could lead to further delays.

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