British Energy bail-out raised to £650m

Insolvency remains real possibility/Rival generators attack government lifeline

The Government yesterday agreed to increase British Energy's financial lifeline to £650m and extend it by a further two months but it warned at the same time that administration remained a real possibility.

The embattled nuclear electricity generator also cautioned that there was no guarantee that it could be saved from insolvency. Shares in the company fell 14 per cent after having risen sharply in the previous three days.

The new loan facility runs until 29 November and is secured against most of British Energy's UK and North American nuclear stations, making the Government the company's senior creditor. Robin Jeffrey, the executive chairman, said the new facility would allow his company to continue operating while it worked on longer-term restructuring options. The initial £410m loan expired today and had it not been extended then British Energy would have been forced into administration.

However, sources close to the Government cautioned that the company could still go to the wall. "[The Government] is dispassionate about what happens next. It could well go down the route of administration," one source said.

British Energy said: "At this stage there can be no certainty about the final shape of any restructuring or whether it will preserve value for investors."

The extended loan will provide British Energy with working capital and collateral to continue trading in the UK and North America.

British Energy would not break down how the loan would be used or how much of the original £410m facility has been used up. But the company is estimated to need an additional £5m to £6m a week to meet its working capital requirements.

British Nuclear Fuels initially agreed to allow British Energy to reduce substantially payments due under its £300m fuel reprocessing contract but is now understood to be asking for the payments to resume.

The Secretary of State for Trade and Industry, Patricia Hewitt, said the Government's priorities remained nuclear safety and security of supply. "No decisions have been taken and no commitments given on the company's long-term future," she added. Ms Hewitt also insisted that the loan complied with European Commission rules on rescue aid.

Environmental groups and rival electricity generators attacked the move. AES, which owns the giant Drax coal-fired station in Yorkshire, said the move would have a "seriously distortive effect" on the UK's wholesale electricity market. Garry Levesley, vice-president of AES, said: "This short-term measure is not only discriminatory and blatantly anti-competitive, but will quickly unravel and present significant costs and serious problems elsewhere in the market in the medium to long term. Market forces must be allowed to prevail."

Meanwhile, Greenpeace, Friends of the Earth and the Labour environmental pressure group Sera called on the Government to stop propping up British Energy by pouring taxpayers' money into a "black hole". A Greenpeace spokeswoman, Emma Gibson, said: "Tony Blair has ducked an opportunity to finally deal with Britain's nuclear headache." FoE's nuclear campaigner, Bryony Worthington, said the nuclear industry was "out of economic control" and called on the Government to rule out further subsidies and building new nuclear stations.

Tim Yeo, the Tory trade and industry spokesman, accused the Government of dithering over its nuclear energy policy and said: "Applying a larger and larger sticking plaster to an open wound will not stop the bleeding." He called on Ms Hewitt to exempt British Energy from the Climate Change Levy.

But the Liberal Democrats' spokesman, Vincent Cable, said taxpayers' money was being put at risk over a "failing privatised company".