Nuclear power? Yes please

A revolution is set to surge through Britain's energy industry. Brace yourselves

On the windswept north Ayrshire coast lies a clue to the future of one of Britain's most important industries. Facing the island of Little Cumbrae, the imposing structure of the Hunterston B power station is an unmissable landmark in this part of Scotland.

But after Tony Blair's Cabinet reshuffle, the British Energy power station now signifies more than a local landmark. The 1,288 megawatt plant lies in Cunninghame North, the constituency of newly promoted energy minister Brian Wilson. A keen devotee of nuclear power, he has taken over from nuclear sceptic Peter Hain. According to senior Government sources, Mr Wilson, with his DTI boss Patricia Hewitt, is about to front one of the most far-reaching reviews of energy policy for decades.

But the review of the energy industry ­ which contributes 5 per cent to Britain's GDP ­ will not confine itself to whether or not to build more nuclear power stations. It could also lead to new companies entering the crowded energy market, a new regulatory regime and closer integration with mainland Europe.

A little background: unlike California, which has suffered months of blackouts, Britain has a stable energy supply. It was the first European country to deregulate its market in 1990 and has enjoyed over-capacity.

With coal, gas and nuclear generating roughly one third of power apiece, the country is not dependent on one limited resource.

But this could change. New European environmental policies will put pressure on the Government to reduce its reliance on fossil fuels and curb sulphur dioxide emissions. The chief culprit is coal-fired power stations. With these generators gradually being phased out, nuclear and renewable energy is expected to take up the slack.

Labour's election manifesto makes a commitment to deliver 10 per cent of the UK's electricity by 2010 through renewable sources and, according to government insiders, this will form a key plank of the energy review. The manifesto also takes a softer line on nuclear power than in 1997, when it stated that there was no case for new reactors ­ further evidence, analysts say, of Labour warming to nuclear power.

If there is to be a shift to nuclear, there needs to be new investment. But Malcolm Grim- ston, an energy expert at the Royal Institute of International Affairs, warns that under the current market structure, there is no incentive for companies to build new plant. Over-capacity in the market means new generators would only be used at peak times for power demand. But two years down the line, with demand rising and an increased pressure to close down dirty power stations, the country may face a shortfall.

For the firms that already generate power ­ like PowerGen, British Energy and Innogy ­ a more immediate problem is energy regulator Ofgem, run by Callum McCarthy.

The tension between the generators and the regulator dates back to early last year. As part of the shift towards the new electronic market for electricity trading, called Neta, Ofgem asked the generators to sign new licences. Fiendishly complicated, these gave Ofgem the power to impose big fines if it deemed that a company was abusing its market position.

British Energy and AES (owner of Drax power station) kicked up a fuss and referred the matter to the Competition Commission. Ofgem lost the argument and its relationship with the generators has never been the same since. It is now consulting on a new, softer set of licences. But the generators are digging in their heels. Says one executive at a power generator, who asked not to be named: "Callum sees red mist every time people talk about power generation. We operate in a fully competitive market and the licences are unnecessary."

Next week, DTI officials will meet the new energy minister to discuss Ofgem's latest proposals. But there is now talk of a slimmed-down regulator. Says one government adviser: "It has too much of a grand view of its role. Now is the time to draw back its claws."

Ofgem certainly isn't cheap. Largely funded by the private electricity companies, it is budgeted to spend £33.5m between 2001 and 2002. Its costs are spiralling, too. Between 1996 and 1997, when there were two separate regulators for gas and electricity, the bill was just £23.1m. The more Ofgem spends on regulation, the more it eats into the electricity companies' margins.

The electricity industry isn't totally open to competition, however. The National Grid and the 15 regional electricity distribution companies are in effect monopolies. As such, distribution is the most heavily regulated part of the industry, with tough price caps imposed on all the companies.

But again there is a feeling, both in the industry and among some government advisers, that the regulator is too tough.

A spokesman for the Electricity Association says: "The price capping makes it very difficult for distribution companies to invest in the business. We would not want to see this stretched any further."

If Ofgem does turn the screw in the next pricing review ­ due in 2004 ­ then some analysts warn it could lead to regional black-outs. The problem could be especially acute if generators start to develop smaller, localised power plants. Mr Grimston says: "Following liberalisation, the average plant size is falling. If this leads to local generation, the network companies will have to significantly upgrade their wires. There is a genuine question as to where the money will come from to do this."

The electricity market in the UK is just part of a wider picture. Countries on the Continent are beginning to deregulate their markets, presenting the possibility of nations co-operating in supply. Britain has a role to play: there is already an power cable running from the Kent coast to Dunkirk. More lines will follow.

New markets, nuclear power and the role of the regulator are expected to top the agenda in the energy review. But for those who can't wait, a trip to Mr Wilson's constituency could be worthwhile.