December 2002
Power play goes nuclear
The Observer, December 1, 2002
By Oliver MorganOriginal address: http://www.observer.co.uk/business/story/0,6903,851181,00.html
[Posted 02/12/2002]
Appointing a new head at British Energy is the latest twist in a Whitehall drama, but won't solve the energy crisis.
When British Energy appointed Adrian Montague as its new chairman last week, it was clear that the Government's price for keeping the crippled nuclear generator standing was to move its tanks from the lawn into the boardroom.
Along with the restructuring package accompanying the third extension of government aid in as many months, industry and the City were clear about what had happened. 'It is not exactly renationalisation,' said one analyst. 'For example, the directors are not appointed by the Government and it remains a plc. But it is pretty close.'
In short, the complicated package is intended to cut BE's costs, deal with its liabilities (both at a cost to taxpayers) and raise cash to provide a way out of insolvency. The quid pro quo is effective government control.
One analyst said: 'The key point is that the Government now owns 65 per cent of the company's cash flow. That's 65 per cent of the economic value of the company. When you look at Montague's appointment, it is clear that the Government is calling all the shots.'
Montague replaces Robin Jeffrey, a Scot whose career was spent in the nuclear industry. Jeffrey took over the company last year, and has been fighting to keep it afloat while energy prices have fallen below the £17 per megawatt hour it costs BE to produce it. Jeffrey's initially close links with the Department and Trade and Industry (DTI), in whose fiefdom BE nominally falls, became strained as concerns about the company grew.
Montague, on the other hand, has a background as a high-flying City lawyer and banker. He is currently deputy chairman of Network Rail. But his earliest, and some say his closest, links with the Government are with the Treasury. His appointment is read by many in the industry as evidence of the key role played in the BE crisis by Whitehall's most powerful department.
Montague was appointed in September 1997 by the then Paymaster General, Geoffrey Robinson, to the Treasury's Private Finance Initiative Task Force, charged with turning around a gridlocked policy vital to Gordon Brown's agenda of fiscal prudence. He delivered.
Robinson himself has given advice and written a paper for Ministers on how to deal with the New Electricity Trading Arrangements system (Neta), introduced in March last year, which has seen electricity prices plummet.
News of Robinson's role - which indicated the Treasury could be muscling in on BE - caused anxiety in the DTI. It dismissed his significance, but advice in his paper about how to protect nuclear power from Neta is being taken seriously, particularly by Energy Minister Brian Wilson, who blames the market for the crisis.
Robinson is in a good position to advise. Energy has caused problems for Labour since the future of UK coal mining was threatened by the ending of favourable long-term contracts with generators. With high electricity prices underpinned by the 'pool' auction system, the generators had built gas-fired power stations that challenged coal.
Robinson advised on the White Paper of 1998 which imposed a moratorium on gas-fired power stations and proposed an overhaul of the 'pool' into the bilateral system that would become Neta. But the result of the 'dash for gas' was 30 per cent generation overcapacity.
Neta has exposed this overcapacity. BE and other generators - including Powergen and the American-based companies TXU and AES- have found that they cannot sell power for a profit, and have respectively mothballed plants, gone into administration or arranged standstills with their creditors.
The Government's king-sized problem is what to do next. DTI Secretary Patricia Hewitt argues that BE's problems are specific and did not 'arise from the nature of nuclear power'. This is also the line in the Treasury. But it ignores several key issues which are causing serious splits in Whitehall and beyond.
First there is Neta. One DTI source said: 'It is central. If something doesn't happen about prices, we will be back in the same position next year.'
But the Government has to resolve much wider issues in its White Paper. The problems were addressed in a cross-departmental review by Tony Blair's Strategy Unit into the energy question, which reported in February. The review saw DTI thinking on energy policy challenged from all sides, and points to future battles over the White Paper.
Blair himself, who as Shadow Energy Minister opposed privatisation in 1988, was concerned about large-scale issues: that the UK would lose its energy self-sufficiency after 2010, how to keep the lights on in a deregulated market and, crucially, how Britain would keep to its Kyoto pledge to reduce greenhouse emissions if it continued to rely on fossil fuels.
A member of the unit said: 'The review was called for two main reasons. First because the Government did not know how to respond to the 2000 Royal Commission report on environmental pollution, which said greenhouse gases should be reduced by 60 per cent by mid-century.
'Second, Blair had been quite alarmed by what had happened in California and by people saying we would become reliant on imported gas from Russia, which raised two issues - diplomatic, and the continued reliance on fossil fuels.
'There was a third issue - but people never put it to the front because it was desperately sensitive. But it was nuclear.' The third issue turned out to be the most difficult, and coloured the thinking of the entire review.
Labour had been on the back foot on nuclear since autumn 2000, when the Conservatives announced they supported a new generation of reactors. The reasoning was simple: government figures showed carbon dioxide emissions falling from 168 million tonnes in 1990 to 152.2m in 2000. But they are predicted to rise again to 156.3m in 2010 and 164.9m in 2020. The reason? The retirement of nuclear stations.
By breaking a taboo on discussing new nuclear plants, the Conservatives revealed the deep splits among Ministers and Labour MPs. Some - often those supported by engineering unions keen to preserve jobs - are supportive. But those with mining constituencies and environmental priorities are opposed.
The process of the review laid bare these problems. Wilson, appointed as Energy Minister after the last election, chaired the review's 'steering board'. Given his open support of nuclear, the assumption was that the review would rubber-stamp a policy based on new nuclear power stations. That was not how it turned out.
Other Ministers such as Michael Meacher, who has the Environment portfolio, as well as Wilson's predecessor and Blair confidant Peter Hain, sat on the committee. The former is a staunch opponent of nuclear. Hain is sceptical. Only last week he made clear his concerns about new nuclear stations in the Commons debate on BE.
A member of the review team said: 'Wilson would chair the steering board meetings. But Meacher made sure he came along and that any argument posited in favour of the future of nuclear was answered. He would say: "I am not anti-nuclear, it's just that I haven't seen any arguments in favour of it".'
Wilson's role was more equivocal than expected. For example, he was as exasperated as the rest of the board by BE. One member said: 'BE's submission argued for 10 new reactors on the basis of economies of scale, and a guaranteed place in the market for nuclear power. It was dismissed out of hand as special pleading.'
A pattern of leaks indicated how battles were being fought. BE's demand for new reactors was glossed as 'a probability' by pro-nuclear members of the review, as were proposals to relieve nuclear from the Climate Change Levy (CCL), which taxes energy sources that emit carbon dioxide.
On the other side, leaks to environmental groups said the review was tending towards a focus on boosting investment in renewable technology. For its part, the Treasury rubbished the suggestion of a CCL exemption for nuclear power.
A senior review member said: 'It was very difficult. Nuclear has its supporters, but there were many people who were unhappy about it. We had to keep them both on board.'
The review said 10 per cent of energy should be generated by renewables by 2010, and it 'kept the nuclear option open'. But the review did not foresee what was to come. It stated that liberalised and competitive energy markets had been a success and that 'there is no current case for further government support'.
The electricity crash has undermined both of these statements. But the first of them betrays the hand of another key piece in the energy puzzle - Callum McCarthy, head of Ofgem, an advocate of the value of the market for electricity in general and Neta in particular, and resistant to changing it.
One Downing Street Strategy Unit insider said Ofgem had been very unhelpful during the review. McCarthy would not accept that Neta was bad for renewables, which the report suggested it was. 'We suspect that they were briefing against us in Downing Street, taking the view that theirs was the only view on energy that counted,' the insider said.
Relations between McCarthy and Wilson have soured. Wilson blames Neta not only for what has happened to BE, but for the carnage in the market, which is making planning to balance future energy policy even more difficult. 'Neta was designed to replace [the pool] with a market designed to be competitive,' McCarthy said.
The problem for the DTI is that the view that Neta is to blame is not held right across the Government. As one insider said: 'All the Treasury cares about is that the cost of electricity is low. But the fact is that because of the obsession with keeping prices down, BE is being bailed out and taxpayers, rather than electricity consumers, are picking up the bill.'
While wholesale prices have fallen 36.5 per cent since 1999, DTI insiders said, prices to small domestic consumers have risen by 1.8 per cent. The Government has been considering ways of mitigating the volatility cause by Neta, including so-called 'capacity payments', which generators are given for making plants available when they are needed.
Robinson is understood to have made suggestions of his own - including forcing suppliers to take nuclear output at a set price outside the Neta mechanism.
Despite its suspicion of Robinson, the DTI believes the resolution of this issue is crucial to meeting environmental targets in its energy policy. But resolving it will not help with more controversial issues such as the role of nuclear and renewable energy sources.
Whatever Hewitt says, BE's future will be central to that debate. Much rests in Montague's hands.
The big hitters in the electric storm
Brian Wilson
Wilson was appointed as Energy Minister after the 2001 Election. He is MP for Cunninghame North in Scotland, which contains the Hunterston B nuclear power station. He has not disguised his belief that nuclear power is vital to the UK's future energy policy. However, as chairman of the Prime Minister's Strategy Unit report on energy, he balanced the arguments for nuclear against the need to secure investment in renewable energy technology such as wind and solar power. He has become convinced that the method of selling wholesale electricity through a bilateral trading system is the root of the current crisis.
Callum McCarthy
A former investment banker in the City, McCarthy replaced Stephen Littlechild as energy regulator after the 1997 general election. While Littlechild attempted to break the dominance of generators Powergen and National Power by forcing them to sell power stations, McCarthy believed the problems were due to the auction process of selling electricity through the 'pool'. He is a staunch supporter of the Neta arrangements and believes the turmoil among generators is due to excess capacity. His style is measured and analytical, but he is described as 'ideological' by his detractors. He is due to retire next year.
Robin Jeffrey
Jeffrey has spent his career in the nuclear industry. He replaced the affable Peter Hollins in the top job at British Energy after taking credit for BE's successful acquisition of the Bruce nuclear power stations in Canada. Ironically, his last job as Executive Chairman was to negotiate the sale of Bruce in order to raise cash to pay off the Government's £650 million loan. Jeffrey has been criticised for not revealing the true position of BE's problems early enough, but he maintains that he kept the markets informed. He is fond of Scotch whisky, playing baroque music and reading Adam Smith's The Wealth of Nations .
Adrian Montague
Montague replaced Jeffrey as British Energy chairman last week. A former projects lawyer with Linklaters and Paines and banker with Dresdner Kleinwort Benson, Montague has become the Treasury's favoured expert for advice on public private partnerships. He worked on the financing of the Channel Tunnel Rail Link and was appointed to the Treasury's Private Finance Initiative taskforce in 1997. Last year he was hired by John Prescott to drive through the public private partnership for the London Underground. Highly experienced, his job will be to steer BE away from administration, if he believes it is possible.
Michael Meacher
The Environment Minister, who served in the 1976-79 Callaghan administration, is one of the veterans of this Government. His chances of longevity in the Blair administration were questioned when he landed a government job after the 1997 election, but he has survived thanks to his mastery of the environmental brief, his political shrewdness and, some have said, Blair's lack of interest in green issues. Meacher is one of the nuclear industry's most redoubtable foes in Whitehall. His brief gives him influence over issues such as disposal of nuclear waste and reprocessing, both crucial to the future of the industry.
Geoffrey Robinson
Robinson has had a role in energy policy since Labour came to power in 1997, when he was appointed as Paymaster General. His views have been widely sought thanks to his business experience. His involvement goes back to the 1998 energy review, when he devised a strategy to prevent widespread job losses in the coal industry. Although he resigned over the Peter Mandelson home-loans scandal, his views are still influential and have been sought by allies such as Gordon Brown. He recently wrote a paper on energy policy for DTI ministers and has offered them advice on how to reform the energy market.
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