Scottish & Southern buys Swalec for £210m in drive for critical mass

British Energy yesterday pulled out of the domestic energy market, in the latest consolidation move in the increasingly competitive sector.

British Energy yesterday pulled out of the domestic energy market, in the latest consolidation move in the increasingly competitive sector.

The company, which generates most of its electricity from nuclear plants, said it had sold its main domestic supply business, Swalec, to Scottish & Southern Energy for £210m in cash. Swalec, which British Energy bought only a year ago, has 850,000 electricity and 300,000 gas customers, mostly in Wales.

Peter Hollins, chief executive of British Energy, said: "Building the domestic supply business has been slower than we had hoped. We wanted to get up to four or five million customers to become competitive. But the prices of these businesses keep going up. Since we bought Swalec the world has moved on."

Mr Hollins said the company would have had to spend £750m on acquisitions to build the required critical mass. The company will now concentrate on wholesale contracting, direct sales to business customers and buying nuclear plants in North America.

Alec Armstrong, an analyst at Charles Stanley, said: "I'm surprised at this strategic U-turn. They bought Swalec to have a guaranteed customer for their output."

British Energy also announced a 10-year contract to supply electricity to Scottish & Southern, which it said would compensate for the loss of Swalec.

The sale comes ahead of the introduction of new electricity trading arrangements later this year, which will hit British Energy by taking away the guaranteed customers provided by the current pool system. Nuclear plants are not flexible and cannot quickly be turned on and off to respond to demand.

British Energy bought Swalec from multi-utility Hyder for £103m. That deal included the customer base and the Swalec brand name, but the physical energy distribution infrastructure is still owned by Hyder.

After yesterday's purchase, Scottish & Southern has a total of four million electricity and one million gas customers, placing the group in third place in the UK energy market behind Centrica and TXU, the US utility.

Analysts said economies of scale meant that domestic suppliers need four to five million customers to be competitive. Yesterday's deal followed a similar move by United Utilities last week, which sold its retail business to TXU.

Ian Marchant, finance director of Scottish & Southern, said the exits by United and British Energy were "classic double or quits decisions". He said he expected further such moves and that Scottish & Southern could snap up more retail businesses.