A tight ship in rough waters

Power prices in the UK have fallen dramatically in recent months. What can the UK’s biggest power producer do to prevent more losses in this difficult market? Joel Hanley profiles British Energy

It is not a good time to be a power generator in the UK. Electricity prices have slumped since the March 2001 introduction of the new electricity trading arrangements (Neta), and the UK’s largest electricity generator has suffered. British Energy (BE) – based in East Kilbride in Scotland – is the UK’s main base-load supplier, with 9.6 gigawatts (GW) of nuclear capacity and 2GW of fossil-fired plant. However, it is in the prompt market that power generators are likely to make their profits, leaving BE to rethink its strategy.

In readiness for the challenges Neta would bring, the company added its first non-nuclear plant – Eggborough – to its existing eight power stations in March 2000. David Wallace, a spokesman for BE, says, “We needed flexibility in our portfolio, and that’s the main reason we bought Eggborough.” Yet this added flexibility has had little impact, at least on the share value, as falling prices have taken their toll.

However, Wallace says the company is not a victim of Neta and is certainly not unhappy with the new regime. “We’re very comfortable working in the commercial world,” he says. “We should not be – and are not – afraid to work under Neta or under any similar market initiatives.”

Such similar market initiatives include the UK government’s climate change levy, a controversial greenhouse gas reduction programme that charges energy suppliers for their emissions, in order to reduce energy consumption. Under the scheme, BE expects to pay £50–100 million ($78–156 million) in registration fees, and a further £20 million in rates.

The company is in regular communication with the government on this issue and is pushing for a “level playing field when it comes to rates”. Indeed, at the BE annual general meeting (AGM) on July 16, executive chairman Robin Jeffrey urged shareholders to bolster the firm’s lobbying effort by writing to their members of Parliament and the government.

It was at the same AGM that BE said it was expecting a further shortfall in revenue over the next year of £50–60 million as a result of continued low electricity prices.

£80 million had been previously set aside for an out-of-court settlement with Scottish Power and Scottish and Southern Energy. These two electricity retailers have, under the Nuclear Energy Agreement (NEA) – a deal brokered in 1990 to protect the nuclear industry – been obliged to buy BE’s output until 2005.

While electricity prices have fallen for most firms, the two retailers felt the nuclear power they were buying under the NEA was too expensive, as the price had not dropped along with the rest of the market. So, with the firms having agreed new terms with BE, prices under the NEA are coming more into line with the cost of electricity in England and Wales, something BE says all parties are pleased with, while not saying exactly how the deal was settled.

“The situation where three Scottish companies had to go to court was simply ridiculous,” says Wallace. “We have come to an agreement, and it means that the companies can now get on and do what they’re good at.”

With this dispute behind it, BE can indeed concentrate on its core business, while expanding elsewhere. In its report for the year ending on March 31, 2002, BE revealed a £41 million loss in the UK, but its two North American ventures – Ontario-based Bruce Power and AmerGen Energy in Pennsylvania – helped offset this to create a £42 million profit.

According to credit rating agency Moody’s, these foreign i nvestments stand BE in good stead. Despite downgrading its credit rating for the firm from A3 to Baa2, the agency says in its July 2002 report on the nuclear powerhouse: “The management deserves much credit for having identified the opportunities in North America.”

So where does BE go from here? Despite the losses being suffered in UK power, the company remains committed to investing in new generation and is carrying out feasibility studies of new reactor plans. Such moves, Wallace says, do not necessarily fly in the face of logic. “Although the current situation would suggest that no-one is going to invest in new build at the current prices, we feel the government will recognise the benefits of nuclear, and that’s why we’re looking at two new reactor designs. We’re very optimistic.”

BE is also looking into boosting its direct-supply operation, targeting medium-sized businesses. The company has around 100 such customers, but intends to boost this figure by 25% over the next two years, guaranteeing sales in a difficult market. This potential revenue, added to a £150 million cost-saving exercise and a return on investment in its foreign operation, is likely to get the firm out of the hole electricity prices have dug for it, Wallace feels.

“No-one could have foreseen the fall in electricity prices that we have seen in the market,” he says. “We just have to make sure we run a tight ship, and we’ll be fine.”