Dump coal-fired stations to save nuclear power, says think-tank

Britain's ailing nuclear industry could be rescued if the Government closed down some of the coal-fired stations, a left wing think-tank has suggested.

The call, from the influential Blairite Institute of Public Policy Research, comes in the wake of the Government bail-out of British Energy and the mothballing of two power stations by Powergen and is being made as one of the largest coal stations in the UK heads towards a fresh financial crisis.

Alex Evans, Energy Research Fellow at the IPPR, has warned ministers that if they bail out nuclear power company British Energy, which is in danger of going into administration, they would "make a mockery" of their own competition policy.

The IPPR also hit out at financial support given to British Energy. "By supporting British Energy, the Government is unfairly penalising other energy companies – and there is a real risk of political fallout if they fight back. Instead of focussing on short-term pain relief, the Government must address the real problem of overcapacity in generation," Mr Evans said.

"This can be achieved in the short-term through incentive payments for the oldest and dirtiest coal stations to close early. This will help British Energy by easing overcapacity while at the same time reducing carbon dioxide emissions."

Other energy companies have been hit by falling energy prices in the wake of the reform of the electricity market earlier this year. Drax, the coal-fired power station in Yorkshire, has been hit by high debt levels and rising insurance costs. Now it may have to renegotiate a lifesaving contract with TXU, the energy giant whose shares were briefly suspended in New York last week, as investors panicked over liquidity concerns.

TXU reassured the market about its overall liquidity, but ratings agencies are still alarmed by prospects of a cash crunch at its European subsidiary. Fitch rating agency downgraded its debt last week to below investment grade level while Standard & Poor's downgraded due to "immediate liquidity concerns".

"If TXU sinks, then there's a distinct probability that that would cause severe distress at Drax," said Michael Sonenshine, a high yield debt analyst at Credit Suisse First Boston.

He has downgraded around £225m of Drax's bonds and claimed, in recent research, that they have no asset value.

TXU has said it is renegotiating contracts with power stations that call for it to buy power at prices well above the current market rate. The contract at Drax is worth between £200m and £250m, and is responsible for more than half of the station's output.

Garry Levesley, a vice president of AES, the US company that owns Drax, has said that the power station is the cleanest and most efficient coal-fired station in the UK.

"The older, dirty stuff needs to be taken out of the system," he said. "The Government would be better off to buy the old, uncompetitive generators and shut them down." Drax has debts of £1bn and bankers fear it could default on the loans.

The IPPR's call for the closure of coal- fired stations will come as a surprise to anyone who remembers the left wing slogans of the 1980s "Coal not dole" and "Nuclear power – no thanks".

Old priorities such as saving the jobs of miners have been replaced by more pragmatic concerns about climate change and the state of the energy market.