play goes nuclear
The Observer, December 1, 2002
By Oliver Morgan
Original address: http://www.observer.co.uk/business/story/0,6903,851181,00.html
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
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
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
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.
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.
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
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.
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.
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.