End in sight for British Energy talks

After months of on-off negotiations, it looks like EDF and Centrica may finally have struck a deal to buy British Energy.

by
Last Updated: 31 Aug 2010

The French power giant – which runs the biggest nuclear power operation in the world - and its partner company, owner of British Gas, are expected to announce the £12bn deal early next week, according to reports from the BBC and elsewhere. If it goes ahead, the  deal will be a key plank of the plans to build a new generation of nuclear reactors in the UK: BE’s shares rose 8% on the news.

 

Despite the protracted nature of the talks, there was never much doubt that EDF as lead partner was very keen to acquire BE. Its starting price back in May was 680p a share, but a £12bn deal would be more like 775p a share. The reason is clear – EDF wants to build power stations here, and the British company holds the keys to future nuclear development in this country. It owns the eight existing reactor sites, and although most of its plant is nearing the ends of its life, the sites themselves are the obvious places to build new ones. Just imagine trying to get planning permission for nuclear power stations anywhere else…

 

As junior partner in the deal, Centrica is expected to pay about £3bn for a 25% stake, with the government left with around another 25%.

 

The deal would be a crumb of rare good news for embattled PM Gordon Brown, reeling as he is this morning from the dramatic loss of the Glasgow East by-election. For once the public sector seems to have got a decent price for one of the national assets. It could net around £4bn for the Government, which is so hard-up thanks to the credit crunch that it is having to rethink its famous fiscal golden rules on borrowing – created by Brown himself, of course.

 

But even this side of the tale is not without controversy – the deal may not have been formally announced but that hasn’t stopped the row about what to do with the money. It will go into a fund called the Nuclear Liabilities Fund, set up to pay for the huge costs of decommissioning old reactors and indeed any new ones when they get to the ends of their lives. But what should the Nuclear Liabilities Fund then be allowed to do with it? The funds existing monies are on deposit in the National Loans Fund (still with us?) – a sort of government building society account – safe as houses but offering an extremely modest 5% interest rate.

 

Given that the costs of decommissioning, though uncertain, are bound to run into tens of billions of pounds, many critics say that the Nuclear Liabilities Fund trustees should be allowed to dabble in some rather higher-yielding investments. If they don’t, runs the argument, the money they have (around £6bn including the proceeds of the BE deal) will never grow enough to have a hope of paying for the national nuclear clean up operation. Of course, what the City types don’t say is that higher returns entail higher risks, so the Fund could also end up losing its shirt…

 

One final twist in this complicated saga is that money kept in the National Loans Fund counts against the public sector borrowing requirement. So the pressure will be on the Nuclear Liabilities Fund trustees to bung the lot in there to shore up our shaky public finances. Phew! And you thought it was just a case of one company buying another. But nothing in this industry is ever that simple… 

 

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