Generators exposed after collapse of TXU Europe

TXU Europe, the embattled energy company, last night called in the administrators in a move that leaves a number of electricity generators exposed to heavy losses and could even push some into default.

Ernst & Young and KPMG were appointed as administrators after the US-owned company went to the High Court to seek protection from creditors owed a total of £2.9bn.

Among the companies that will be affected by the move are Scottish & Southern Energy, which has a £175m exposure to TXU, and International Power, which analysts estimate has an exposure of £40m.

TXU's move makes the future of the AES-owned Drax power station in Yorkshire, the largest in the country, even more precarious. TXU was taking 60 per cent of Drax's output but AES tore up the contract on Monday night after a long-running payments dispute.

The decision to call in administrators also threatens the jobs of TXU's 250 staff in Ipswich, most of whom are involved in energy trading. A spokesman could not say how long the jobs would remain secure or the level of trades with counter-parties which now need to be unwound.

TXU Europe has been hanging on by a thread since its parent company in Texas withdrew its financial support last month. TXU subsequently sold its UK retail energy business, which has five million customers, to Powergen for £1.6bn and its German energy division is also up for sale.

The company has since been attempting to complete a "work out" of its contractual obligations which would result in it winding itself up in an orderly and voluntary fashion.

The trigger for calling in the administrators was AES's decision to stop supplying it and start proceedings to have it wound up. "The appointment of administrators will allow us to continue with the workout and protects us from being wound up. This is the best way of delivering value to creditors of all classes," a spokesman said.

International Power, S&SE and the other generators contracted to supply TXU now face having to run their stations as "merchant plant", getting whatever price they can for their output on the open market. The long-term contracts with TXU had been struck at prices well in excess of, and in some cases double, current spot prices.

International Power, which yesterday reported a 37 per cent drop in third-quarter profits to £55m and further problems with a Czech power station, said the uncertainty over TXU put the contract with its Rugeley power station at risk. A spokeswoman said it should be able to quantify the exposure in the next few days if the contract was terminated.

Meanwhile the energy regulator, Callum McCarthy, again defended the new electricity trading arrangements which have been partly blamed for the demise of TXU and the solvency crisis facing British Energy.

Speaking at a credit seminar in London, the chief executive of Ofgem rejected claims that the market was "bust". Mr McCarthy said: "I see no basis for arguing that the market, as distinct from decisions by those who bought generating capacity or contracted to take power at unsustainable prices, is wrong. Some people have bought badly; some have sold well. But the market on that basis is not acting strangely."

He said the fall in prices was exactly what would be expected in an oversupplied market. While "the unwinding of artificial and uncompetitive arrangements is always painful" it was not illogical, nor did the financial failure of some companies threaten security of supply.

Mr McCarthy also warned that profit margins being made by electricity retailers of up to a third might not last. He went on to say that Ofgem was looking carefully at the "high and rising" debt levels of some companies that owned electricity distribution networks.