Jeremy Warner's Outlook: Britain reaches entente nucléaire with French. But will it deliver the goods?
Friday 01 August 2008
Barring last-minute hitches, Electricite de France (EDF) is today expected to unveil agreed takeover terms for British Energy, owner of the great bulk of the UK's ageing fleet of nuclear power stations. In any event, the press conference has been scheduled and it will certainly be a dull old affair if there is nothing other than the results to announce. It's a big moment for the future of nuclear energy in Britain, as well as something of an eye-opener in terms of the power shift it symbolises among Europe's energy utilities.
EDF, lest we forget, is controlled and largely owned by the French state. So to see the British Government, which owns 35 per cent of BE, in effect selling the future of Britain's nuclear industry to the French Government is a watershed event.
The reason for the sale is twofold. There are only three credible technologies for new nuclear build these days and, sadly, British expertise is no longer among them. What's more, EDF has the balance sheet strength to finance new nuclear build privately; British Energy by itself does not.
EDF is therefore judged to give Britain the best chance it has of a new generation of nuclear reactors to replace the existing raft of ageing infrastructure, much of which is due to be decommissioned over the next 15 years.
EDF is buying in part for the residual value of the current fleet of power stations, but mainly for the sites. From a planning perspective, it will be much easier to build on existing sites than try to find new ones. With plans for five new reactors in Britain – at more than £3bn a pop, they don't come cheap – EDF's ambitions for new nuclear are bigger than anyone else's. It has therefore long been the Government's favoured buyer.
We'll have to wait for today's details to see how it all pans out, but presumably EDF will be put under some sort of obligation to make sites available to rivals. The Government is keen to ensure that the future of nuclear doesn't lie entirely with EDF. Both Germany's EON and Iberdrola of Spain have nuclear ambitions in Britain, though not so big that they were prepared to pay up for British Energy.
As it is, the BE board seems to have extracted a reasonably good deal on behalf of shareholders. The British Government, with its strategic priority of energy security and carbon emission targets, might have sold at almost any price to bidders with the money and capability to ensure new reactors get built, but plainly the priority for other shareholders is the rather different one of value maximisation.
Some investors regard even the mooted 750p-a-share cash price as inadequate, given how far energy prices have risen. For them, an alternative equity-style kicker will be offered of so-called "contingent value rights" that will allow participation in any future value enhancement.
Again, it is unclear how these CVRs would work, though they are a not uncommon feature of acquisitions in the US and continental Europe, and are likely to be linked to the price of power. In any case, their inclusion seems to have been enough to persuade the BE board.
As for Centrica's involvement, that comes later. The anti-trust issues are already problematic enough, with some rivals complaining loudly about access to base load electricity and the supposedly dominant market position BE will give EDF in electricity generation, without complicating them further by bringing Centrica on board right at the start.
The intention is that Centrica should take a minority stake at a later stage, allowing the company that has just jacked up its gas prices by 35 per cent a fixed-cost hedge against its current exposure to volatile wholesale markets.
Does it matter that the future of nuclear is being largely surrendered to French government control? France's dirigiste approach to commerce makes it rather better at utilities than we are, so you could argue that it's a positive boon. Yet EDF is not investing in Britain out of pity. The French will be just as keen as Centrica to make the consumer pay.
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