Is nuclear privatisation an option in energy policy? A case study of the UK

TABLE OF CONTENTS

LIST OF ABBREVIATIONS

LIST OF TABLES

CHAPTER 1 INTRODUCTION
1.1 BACKGROUND

CHAPTER 2 DECISION FOR NUCLEAR PRIVATISATION
2.1 ADDRESSING THE ISSUE OF FUTURE LIABILITIES.
2.2 PREPARING THE NUCLEAR INDUSTRY FOR PRIVATISATION
2.3 GOVERNMENT DECIDES TO PRIVATISE

CHAPTER 3 FINANCIAL CRISIS AND GOVERNMENT BAIL-OUT
3.1 GOVERNMENT SAVES BRITISH ENERGY FROM BANKRUPTCY
3.2 GOVERNMENT RESTRUCTURES BRITISH ENERGY
3.2.1 GOVERNMENT’S ROLE AFTER RESTRUCTURING
3.2.2 RECOMMENDATIONS MADE BY THE DEPARTMENT OF TRADE AND INDUSTRY
3.3 RECENT TRENDS IN UK NUCLEAR POLICY.

CHAPTER 4 CONCLUSION

REFERENCES
PRIMARY SOURCES
1.1 National Legislation
SECONDARY SOURCES
2.1 Books
2.2 Articles
IN A BOOK
IN A PERIODICAL
2.3 OTHER
Government documents and reports
Internet

LIST OF ABBREVIATIONS

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LIST OF TABLES

FIGURE 1: COST OF ADMINSTRATION

CHAPTER 1 INTRODUCTION

1.1 BACKGROUND

The Nuclear Industry is considered as one of the most important in the United Kingdom. The industry supplies eighteen percent (18 %) of UK’sElectricity power^[1], hence its importance cannot be over emphasised.

With the conclusion of the privatisation of the electricity and coal industries in the UK, only the nuclear industry remained in the public sector.^[2] In the first attempt at privatisation in 1988 and 1989, it was considered that it was too costly and too financially risky to expose the nuclear industry to competition.^[3]

This situation was not to remain so for too long.

The decision whether to privatise a country’s nuclear power industry is a subject of much debate in all countries. On 15th July, 1996, after much consideration on the issue, the UK government decided to privatise the industry. To this end, the eight nuclear power plants were consolidatedinto one single company , British Energy, which was incorporatedas a public liability company.^[4]

Not long after its creation, British Energy plunged itself into deep financial crisis. The company’s creditors wanted it to declare bankruptcy and go into Administration. The government, however, considered the industry to be too vital to maintain diversity of supply^[5] that it stepped in with a financial bail out.

The government also decided to restructure the company and keep a close monitoring on its activities to ensure that there are no future instances of mismanagement^[6]. This paper will take a critical look at the government’s decision to intervene despite several complaints to the European Commission that such a move is anti competition.

The final research findings will demonstrate that the nuclear industry is a key sector of the UK economy such that the government will not allow it to deteriorate and go into bankruptcy.

Presently, the government is in the process of privatisation of the industry once again. If this happens, what are going to be the likely consequences, criticisms and end results of such a controversial decision?

CHAPTER 2 DECISION FOR NUCLEAR PRIVATISATION

2.1 ADDRESSING THE ISSUE OF FUTURE LIABILITIES.

After embarking on privatisation of the electricity industry in the UK in the early 1990’s, it seemed quite likely that the nuclear industry would be part of the plan. In order to do so, the British government had to first of all estimate the future liabilities of the industry as must of such liabilities had been sponsored by the government. The treasury, therefore, wanted to transfer a large part of the liabilities to the private sector if it was decided to go ahead with privatisation.^[7]

It became clear that the industry was not releasing accurate costs regarding issues such as decommissioning as the costs appeared to be escalated.^[8] Besides, in order to successfully privatise nuclear power, the government had to write off its past investment in the industry. By this, all stranded costs had to be eliminated.

The next phase was to create a revenue source to fund the liabilities. To this end, the Fossil Fuel Levy (FFL) was thus created to generate further income since sale of electricity from nuclear generators will not suffice to cover the costs. The Secretary of State was granted powers to issue an order putting into effect the FFL.^[9] The levy was then required to be paid for by the Regional Electricity Companies (REC’S) as they were mandated to acquire a certain quantity of electricity generated from nuclear generated capacity. This meant that a certain portion of the electricity generation market share will be reserved for nuclear power.

2.2 PREPARING THE NUCLEAR INDUSTRY FOR PRIVATISATION

In preparation for privatisation, the nuclear industry was broken into two companies,

Nuclear Electric and Scottish Nuclear.^[10] The focus now was on the future efficiency of the two companies to ensure their continued existence.

The nuclear industry is one with high cost margins especially with the issue of safety as very important, thus, private investors were reluctant to invest in nuclear power.^[11] For public companies, such costs are easily met from government treasury. As competition was gradually encroaching from Power- Gen and National Power, the management of Nuclear Electric and Scottish Nuclear had to confront the unions and reduce costs. Staff strength was thus reduced and load output from the AGR’s increased considerably thereby reducing operating costs.^[12]

With these improvements, it now appeared clear that when the government decided to review the nuclear industry and embark on privatisation, such a move would succeed since the industry had improved output coupled with an increase in market share.

The Department of Trade and Industry thus began to consider the commercial viability of a privatised nuclear industry. Nuclear Electric made out a case for privatisation arguing private finance will enhance its efficiency.^[13]

2.3 GOVERNMENT DECIDES TO PRIVATISE

The Nuclear Utilities Chairmen’s Group (NUCG) supported the view for gradual move towards privatisation. It stressed the importance of security of supply and the environmental advantages presented by nuclear power.^[14]

The nuclear generators equally argued that their performance had improved considerably and that they could compete on the same footing with the rest of the generation industry if privatisation was decided upon.^[15]

After much consideration, the government, in May 1995, decided to proceed with privatisation.^[16] The conclusion was that the Advanced Gas Cooled Reactors (AGR’s) and all the remnants of their liabilities should be privatised. Nuclear Energy and Scottish Nuclear were to become subsidiaries of a new private company.^[17] It was also concluded that public money would no longer be used for building new nuclear power stations.

The review of the industry in 1995 concluded that government would support and promote the development of nuclear power provided the industry remained competitive and was able to maintain thorough standards for safety and environmental protection. The government also concluded that public sector support for the industry would be an unwarranted intervention in the electricity market after privatisation.

The review also reached the conclusion that privatisation of the industry, together with all its liabilities would be beneficial to the consumers of electricity, the industry as well as taxpayers. In 1989, the nuclear stations had been excluded from the privatisation of the other components of the electricity generation sector, such as coal and gas powered plants. It was observed that an overall transformation in performance of nuclear generators had occurred within this period. Both the AGR’s (Advanced Gas Cooled Reactors), the PWR (Pressurised Water Reactors) and Sizewell B were now operating in good condition.^[18]

[...]

^[1] Jackson K., UK Energy- In Black and White and Green, 61(731), Pet. Rev., p 36-37, (2007).

^[2] Deiter, H., Energy, the State, and the Market, revised edition,( New York, United States: Oxford University Press Inc, 2004.)

^[3] Mackerron, G., What Can We Learn From the British Nuclear Power Experience? in The UK Energy Experience- A Model or a Warning p 247 (Mackerron, G. And Pearson, P. ed., London, UK: Imperial College Press, 1996).

^[4] Robert H., The Privatisation of UK Electricity Industry, Hong Kong Democratic Foundation, 16th April, 1999,www.hkdf.org/newsarticles.asp?show=newsarticles&newsarticle=86 –(last visited on 25/11/2008).

^[5] Jones, P.M.S, UK Nuclear Experience: Where Do We Go Now? in The UK Energy Experience- A Model or a Warning p 238 (Mackerron, G And Pearson, P. ed, London,UK: Imperial College Press, 1996).

^[6] Edmund C., Deal keeps lights on at British Energy, Teleghraph.co.uk, 1/10/2003.

www.telegraph.co.uk/finance/2864759/Deal-keeps-lights-on-at-British-Energy.html

(last visited on 25/11/2008).

^[7] Lester, C., Hunt, Energy in a Competitive Market p 189-190 (Massachusetts, USA: Edward Elgar publishing, Inc, 2003).

^[8] Mackerron, G.S, Nuclear Power Under Review, in The British Electricity Experiment, Privatisation, the Record, the Issues, the Lessons p 9, ( A.J Surrey, ed,, London, United Kingdom: Earthscan publishing, 1996).

^[9] Section 32 of the Electricity Act, 1989.

^[10] Supra at note 6.

^[11] Mackerron, G., Nuclear power and the characteristics of 'ordinariness'-the case of UK Energy Policy, 32(17), Energy Policy, p1957-1965, (2004).

^[12] Supra at note 7 at p. 195.

^[13] Nuclear Electric. Future Nuclear Construction in the United Kingdom, 1, p 4, (1994).

^[14] Nuclear Utilities Chairmens’ Group Submission to the 1994 Nuclear Review (1994).

^[15] Supra note 7 at p 240.

^[16] Department of Trade and Industry and the Scottish Office, The Prospect of Nuclear Power in the United Kingdom, Cm 2860 (HMSO, London) 1995.

^[17] Supra note 4 at p 240.

^[18] Supra note 7 p 197.