Nuclear deal scuppered by Treasury

The Treasury blocked an 11th-hour deal that would have saved troubled nuclear generator British Energy from financial collapse, The Independent on Sunday has learnt.

British Energy was forced to suspend trading on the London Stock Exchange on Thursday after it warned it might have to file for insolvency proceedings.

But senior Whitehall sources have revealed that last week the Treasury put the brakes on a deal between British Energy and British Nuclear Fuels Limited (BNFL) that would have saved the generator from near-collapse. British Energy, which produces around 20 per cent of the UK's electricity, wanted to cut the £300m-a-year cost of reprocessing spent fuel with state-owned BNFL.

The two companies had been haggling over price for nine months. But it is understood that on Monday the Treasury stepped in and said that a price reduction would be a form of unlawful state aid. The Treasury's intervention led to feverish behind-the-scenes lobbying from the Department of Trade and Industry (DTI). Insiders said that even Downing Street Chief of Staff Jonathan Powell was dragged into the row, but the Treasury's ruling stood firm and British Energy was forced to suspend its shares to prevent it trading while insolvent.

The Financial Services Authority is now investigating the circumstances surrounding the surprise suspension.

British Energy chairman Robin Jeffrey is locked in negotiations with Trade and Industry Secretary Patricia Hewitt over a new financial package. Insiders said this could see the Government offering a loan to the company and underwriting some of its £1bn debts – a move that may not require state aid approval from the European Commission. A new deal is expected within a month. The Government is also in talks with British Energy over far-reaching changes to the nuclear market to ensure its long-term future. Sources close to the talks said one idea under consideration would allow British Energy to store spent fuel instead of reprocessing it.

The proposal is expected to appear as a policy in the Government's Energy White Paper, to be published at the end of the year. If British Energy is allowed to store waste it would have a devastating effect on BNFL, which lost £2.3bn last year. About a third of BNFL's £12bn forward contracts at its Thorp fuel reprocessing plant at Sellafield are with British Energy.

The Government had intended to part-privatise BNFL. But the plans were mothballed because of the company's liabilities associated with its nuclear sites.

If the DTI allows British Energy to store its fuel then it will sacrifice BNFL to save the nuclear generator's skin.

Spent fuel storage units could be built at Sellafield, where planning permission and safety clearance would be easier to secure than in other parts of the UK. Storage would be supported by anti-nuclear campaigners and the Irish government, which has tried to legally challenge BNFL's reprocessing at Sellafield.

Professor Andy Blowers, a senior member of the Government's Radioactive Waste Management Advisory Committee, said: "It's a logical move for them to make. The whole trend now is moving towards long-term solutions for dealing with radioactive waste."

Sir Ken Jackson, chairman of Nirex, the nuclear waste agency, said: "Nirex should be independent and should have the task of finding a solution to this waste problem. We need to make provision for safe storage. We can't have nuclear waste stacked up all around the country."