Roller-coaster ride in the generation game

Price falls followed by a sharp rise have plunged Britain's electricity industry into chaos. Clayton Hirst investigates

This week British Energy will miss out on £4.6m of revenue. The stricken nuclear generator will forgo a similar amount next week - and the week after that. In fact, according to calculations by The Independent on Sunday, if energy prices remain roughly where they are today, British Energy will, between now and March, miss out on a staggering £144m. To put it in context, this is nearly six times the company's market value.

It wasn't supposed to be like this. Last winter, when the company was in the middle of restructuring talks with the Government, British Energy sold around two-thirds of its capacity on fixed contracts to companies such as Centrica. The plan was to shield British Energy against further falls in prices. With hindsight, the decision was rotten. Wholesale prices have soared 29 per cent since these contracts were agreed. And while British Energy is forced to sell its electricity at absurdly low prices, the rest of the industry is beginning to reap the rewards.

The three-way bidding battle for Drax, the UK's largest coal-fired power station, is a product of the spike in prices. A few months ago no one would have given the Yorkshire facility a second glance. Its American owner, AES, was earlier this year forced into negotiations with its creditors after Drax lost one of its largest customers, TXU Europe. With electricity prices depressed, the 4,000-megawatt station was suffering large losses. After nine months of talks with 53 banks and bondholders, which were owed £1.3bn, AES threw in the towel earlier this month.

Its timing was poor, as days later, wholesale prices jumped. It was little coincidence that Drax became the subject of a bidding battle between International Power, investment bank Goldman Sachs and mining group BHP Billiton. Creditors have until Wednesday to consider Goldman's offer, and if that is rejected, they have two more days to decide between the other two. All three offers are for Drax's debt, which will give the winning bidder access to a proportion of the facility's equity.

One source close to Drax says: "The bidders are taking a punt on electricity prices going north. Drax is one of the most efficient power stations in the country, so it's the obvious target."

The companies that survived the trough in electricity prices are also betting on further rises. The German-owned Powergen famously branded the industry "bust" last year, and mothballed a quarter of its capacity. But the company is now planning to return some of its power stations to service. The first will be Grain in Kent. Engineers will this week begin to drain the nitrogen from Grain's giant boiler, which has been protecting the facility while it has been lying dormant. Powergen, headed by Paul Golby, hopes to test-run the power station early next month.

Platts, the energy information provider, says that a megawatt hour of electricity can today be bought for around £21. An extra £1.20 will buy a six-month forward contract. Last winter the price was just £17.

Having witnessed a spike in prices, it is no wonder some industry executives are confident that extra demand during the autumn and winter will help to sustain further increases. But this optimism may be misplaced. There is evidence that the recent price increases could be the result of unconnected events.

Under the electricity trading system Neta, the price of electricity is set by the market. The slump in wholesale prices last year was due to a generation oversupply and a relative lack of demand. As a result, companies such as Powergen mothballed generators, which helped to push up prices.

Power stations can't just be switched on and off, however. It takes months to mothball and then bring a station back on line. As a result, companies have to gamble on future prices. This summer, with fewer power stations running, prices went up. But as winter approaches, more stations will come back on line, which could offset the increased demand for electricity - driving prices down again. Patrick Heren, managing director of Heren Energy, a specialist energy publisher, says: "Powergen is bringing Grain back, and I'm certain that other stations will be dusted off. As the mothballed capacity is brought back into service, this will bring prices back in line."

Privately, some electricity company executives are worried that the process of mothballing is making electricity trading more volatile - increasing the risk of the country being heavily under- or oversupplied at any one time. Some companies urged the Department of Trade and Industry to introduce so-called capacity payments in last year's Energy White Paper. This would have encouraged electricity companies to keep power stations operational, even if the market is fully supplied. However, the proposals were thrown out. Many companies, such as EdF, which owns London Energy, are now preparing to urge the energy regulator Ofgem to consider the idea again as part of the forthcoming review of the electricity market.

The record summer temperatures in Britain also placed a strain on generators, helping to push up prices. In searing heat, power stations cannot work at full capacity, but electricity demand is especially high due to the increased use of air conditioning.

This year, however, some of the demand for Britain's electricity came from France - the two countries' electricity systems are connected by an undersea cable. In June, Britain became, for the first time, a net exporter of electricity as France experienced extreme temperatures that claimed the lives of up to 10,000 people. Last week's cooler temperatures brought Britain's wholesale electricity price back in line with that of France.

The recent heatwave and rise in wholesale prices also coincided with a number of British power stations being taken out of service for maintenance. One electricity executive, who asked not to be identified, says some of the repairs were as a result of companies postponing work during the winter. In some cases repairs were delayed because of financial difficulties due, in part, to the low prices.

As Britain's electricity companies prepare for the autumn, the optimism over the wholesale market may be short- lived. Prices may not be about to fall back to a level that will save the blushes of British Energy's executives, but it could make the frenzied battle for Drax look over the top.

Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Guru Careers: Graduate Editor / Editorial Assistant

£16 - 20k: Guru Careers: A Graduate Editor / Editorial Assistant is needed to ...

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Day In a Page

Raif Badawi: Wife pleads for fresh EU help as Saudi blogger's health worsens

Please save my husband

As the health of blogger Raif Badawi worsens in prison, his wife urges EU governments to put pressure on the Saudi Arabian royal family to allow her husband to join his family in Canada
Birthplace of Arab Spring in turmoil as angry Tunisians stage massive sit-in over lack of development

They shall not be moved: jobless protesters bring Tunisia to a halt

A former North African boom town is wasting away while its unemployed citizens stick steadfastly to their sit-in
David Hasselhoff's new show 'Hoff the Record': What's it like working with a superstar?

Hanging with the Hoff

Working with David Hasselhoff on his new TV series was an education for Ella Smith
Can Dubai's Design District 'hipster village' attract the right type of goatee-wearing individualist?

Hipsters of Arabia

Can Dubai’s ‘creative village’ attract the right type of goatee-wearing individualist?
The cult of Roger Federer: What is it that inspires such obsessive devotion?

The cult of Roger Federer

What is it that inspires such obsessive devotion?
Kuala Lumpur's street food: Not a 'scene', more a way of life

Malaysian munchies

With new flights, the amazing street food of Kuala Lumpur just got more accessible
10 best festival beauty

Mud guards: 10 best festival beauty

Whether you're off to the Isle of Wight, Glastonbury or a local music event, we've found the products to help you
Unai Emery’s passion for winning and eye for a bargain keep Seville centre stage in Europe

A Different League

Unai Emery’s passion for winning and eye for a bargain keep Seville centre stage in Europe, says Pete Jenson
Amir Khan and James DeGale’s remarkable Olympic performances were just the start of an extraordinary journey - Steve Bunce

Steve Bunce on Boxing

Amir Khan and James DeGale’s remarkable Olympic performances were just the start of an extraordinary journey
Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf