Energy rescue challenged

AES, the US electricity company that owns Britain's largest power station, is this week expected to announce plans to challenge the Government's £2.1bn rescue of British Energy in the courts.

The owner of the Drax coal-fired station in North Yorkshire believes the bailout will distort the energy market and stop the price of wholesale electricity rising.

It is expected to lodge the challenge with the European Court of First Instance.

The company, which is in the middle of restructuring Drax with its creditors, will claim that the European Commission's decision to approve state aid to the stricken nuclear generator was flawed. In November, Brussels said aid of up to £899m was warranted "on the grounds that there is a risk of disruption in the supply of electricity in the UK and to ensure nuclear safety".

AES refused to comment. But well-placed sources said it believes the EC was wrong to assume that the collapse of British Energy posed a threat to supply and safety. AES believes that the company could have taken other steps, such as mothballing more power stations. This would have helped to increase the wholesale price of electricity.

A spokesman for the Department of Trade and Industry said: "We believe the aid was fully compliant with EC state aid and competition guidelines."

Since 1998 wholesale prices have fallen around 40 per cent. As well as threatening British Energy, the fall led to the collapse of TXU Europe, AES's largest customer at Drax. This forced AES into talks with its creditors at Drax, which is likely to lead to a £1bn-plus debt-for-equity swap.

AES will make a final decision on whether to launch the challenge in the middle of the week, after taking legal advice.