Speaking to the House of Commons on November 28th, Mrs Hewitt laid out British Energys solvent restructuring plan submitted to and supported by the government. The restructuring plan calls on the company to make payments to the Nuclear Liability Fund, or NLF, that will be used to pay for the costs of decommissioning British Energys power stations.
British Energy will issue new bonds to significant creditors, together with new company shares. It will also issue new bonds to the NLF. Not more than £700m worth of new bonds will be issued of which £275m will be contributed to the NLF.
The NLF will also receive a contractual entitlement to receive 65% of the net cash flow of the British Energy Group (after tax, financing costs and transfer to cash reserves), which will go towards the companys £5.2bn total liabilities.
In return, the government will underwrite these arrangements to ensure safety and environmental protection. The government also recognised that for the restructuring to work, it had to contribute significantly to British Energys £2.1bn nuclear fuel liabilities, which extend to 2086. Mrs Hewitt said that the government had agreed to play its part in allowing British Energy to attempt solvent restructuring. This means that the cost to the government or taxpayer will average £150m-£200m a year for the next 10 years and then fall.
And if the company performs well, surpluses from British Energys contribution to the NFL will help to meet the aforementioned costs.
According to Mrs Hewitts announcement, the government is prepared to continue to fund British Energys operations while the restructuring plan is agreed and implemented. The existing credit facility will be extended to March 9th with the size of the facility remaining unchanged at £650m. Of the existing £650m facility, £382m had been drawn down by November 27th. Under the proposal, the money will be progressively repaid as British Energys financial situation improves. If the company goes into administration, the government has vowed to protect the interests of the British taxpayer.
British Nuclear Fuels Limited, or BNFL, has agreed to reduce British Energys annual £300m reprocessing fee.
If the plan fails, however, British Energy could still face insolvency proceedings. Nonetheless, British Energy restructuring plan will make British taxpayers liable for the companys liabilities and multi billion pound nuclear clean-up costs.
British taxpayer to foot the bill
The rescue package will cost British taxpayers £150m-£200m a year for the next ten years to help meet British Energys nuclear decommissioning liabilities and keep the company afloat. Still, this must be considered a short-term measure because British Energys nuclear fuel liabilities extend to 2086.
Even if British Energy goes into administration, nuclear security and energy supplies must still be considered. On this issue, Mrs Hewitt told British ministers that: whatever happens [to British Energy] nuclear power stations will continue to generate electricity.
Nevertheless, British Energys collapse and the subsequent closure of its nuclear reactors might have an implication on the security of energy supplies.
In a telephone interview with Bellona Web Monday, Derek M Taylor, Head of Nuclear Energy at the European Commissions Directorate-General for Energy and Transport said:
Whatever the future of [British Energy], I would not expect the companys reactors to be closed down and decommissioned as this would have an adverse affect on energy security and supply and also place an economic burden on the UK tax payer.
From the point of view of energy supply security, it is very difficult to interrupt the fuel supply of a nuclear power plant. However, the high front-end investment costs mean nuclear power stations need to operate at a high capacity to produce a good economic return, Mr Taylor continued.
If reactors are closed you take away the margin of supply, which could result in having to move to more expensive sources of electricity. At the same time another way would have to be found for covering the costs of decommissioning the plants and managing their waste, Mr Taylor added.
But British taxpayers should be asking themselves if they should be responsible for bailing out British Energy after the company ran up £1.2bn of debt by making payouts to shareholders and after new electricity trading arrangements introduced by the government sent wholesale prices down. The fall in electricity wholesale prices was supposed to benefit electricity customers. In reality, though, while wholesale energy prices have fallen 36.5% since 1999, electricity prices to households have actually increased by 1.8%.
A helping hand from Brussels
On November 27th, the European Commission, or EC, agreed to back the extension of British Energys £650m loan, providing certain conditions were met.
A ceiling of £899m on the amount of aid British Energy can receive was imposed by the EC, though this allows for an extra £276m for contingencies identified by British Energy until a long-term solution for the company is found. The EC wants the British government to present it with plans for the full restructuring of British Energy within 6 months. Besides, British Energy is barred from using government loans to increase output and must repay all government aid at full market rates.
Blame the market
British Energy owns eight nuclear power plants — seven with twinned advanced gas-cooled reactors and an eighth plant with Britains newest reactor, a single pressure water reactor, completed in 1995 and employs 5,200 staff. The company provides 20% of Britains total electricity supply.
The companys financial difficulties started this year and on September 5th managers appealed for government aid. In response, the British government gave the beleaguered private nuclear generator £650m in emergency aid that was due to expire on November 29th.
British Energy blames it financial woes on the fall in wholesale electricity prices brought about by energy market liberalisation, which it believes favours non-nuclear producers of electricity. The company must pay its share of the carbon tax aimed at reducing CO2 emissions, although nuclear power produces no CO2. British Energy must pay £300m a year for spent nuclear fuel, or SNF, to be reprocessed by BNFL.
BNFL comes out on top
As part of the governments attempts to keep British Energy out of administration, BNFL has agreed to cut by half British Energys yearly £300m reprocessing bills.
While this is a short-term measure, BNFL has been able to negotiate extensions for fuel supply contracts to British Energys eight nuclear plants (and 15 nuclear reactors). The fuel contracts were due to expire in 2006 but will now run to the end of each reactors life. This is a lucrative contract for BNFL because the last reactor retires in 2020. BNFL has confirmed that this is worth some £1bn.
Despite promoting a liberalised energy market, the governments package for British Energy means that the government will underwrite the companys liabilities. At the heart of the governments package is the need to guarantee not only nuclear safety but also the security of Britains electricity supplies.
But while British Energy is responsible for a fifth of Britains electricity supplies, there is 20% extra capacity in the energy market. Even if British Energy went into administration, there is sufficient capacity to guarantee Britains energy supplies.
Yet government support might distort competition in the energy market. AES, the American owner of Britains largest power station, Drax, which is also struggling to avoid administration, has criticised the governments decision to extend £650m in loans. AES has argued that the governments support for British Energy distorts the wholesale electricity market and affects its trading position.
Nonetheless, some industry analysts speculate that whatever restructuring British Energy goes through between now and March, the company will continue to operate. It seems, then, that the British government will continue to back the near-insolvent nuclear generator with tax players money on the grounds of energy security and supply.