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
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Content Writer - Global Financial Services

£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Web Developer - PHP

£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future