British Energy’s Nuclear Power Financial Woes

High Cost of Power Generation and Spent Nuclear Fuel Reprocessing is Strangling the UK’s Largest Power Generator Lessons for Japanese Electric Utilities

British Energy plc is the United Kingdom’s largest electric utility, producing one fifth of the country’s electricity. The company owns and operates 15 nuclear reactors in the UK with a combined generating capacity of approximately 9600 megawatts. The company also operates reactors in the United States and Canada.

On 12 August 2002, British Energy was forced to shut down reactor 1 at the Torness Nuclear Power Station in East Lothian because of vibrations in the gas circulation system which cools the reactor. Reactor 2 at the same station has been shut down since May because of a similar problem. The two reactors account for 12% of British Energy’s annual energy output, and according to the company, this and other unplanned outages will reduce forecast annual output by 4.5 terrawatt hours and cost the company 25 million pounds in maintenance costs. News of the Torness reactor shut down caused British Energy shares to fall 30% after analysts claimed a long-term shutdown will lead to reduced profits and dividends.

When British Energy was privatised in 1996 it acquired it’s fleet of 15 reactors from the UK government for just half the cost of constructing it’s newest reactor, Sizewell B. Following recent stock declines, the company’s market value is now a mere 370 million pounds, whereas Sizewell B cost around 2 billion pounds to construct.

Since privatization, British Energy has increased production of it’s nuclear units by 10%, and reduced costs by a full 30%. Nevertheless, the company is still having problems competing in a free-market environment. As a direct result of electricity market liberalization, the wholesale price of electricity has decreased by 30% in the UK in recent years. Power prices are now below 12 pounds a megawatt hour– 7 pounds below the price which British Energy needs for making a profit. Executive Chairman Robin Jeffery recently acknowledged that a further 10% cut in power prices this year will erode 140 million pounds off British Energy’s earnings.

In addition to high nuclear power generating costs, spent fuel management costs have severely hurt British Energy’s financial position since privatization. In November 2001, British Energy executives criticized the company’s reprocessing contracts with BNFL as ruining the profitability and competitiveness of the company. The company’s executives pointed out that reprocessing spent nuclear fuel was costing the company more than six times as much as the cost to store spent nuclear fuel. By simply storing the spent fuel BE estimates it could save 250 million pounds per year.

In its submission on future radioactive waste policy to the House of Commons Environment, Food and Rural Affairs Committee, British Energy described reprocessing as an unecessary and expensive exercise that it cannot afford, and called for an immediate moratorium on any further reprocessing of its spent nuclear fuel at BNFL’s THORP reprocessing plant in Sellafield.

When announcing its semi-annual results on 7 November 2001 a British Energy spokesman stated, "We simply do not believe in reprocessing because of its huge costs and we want to renegotiate this contract. We are paying six times as much to deal with our spent fuel as American generators do at a time when electricity costs have fallen markedly." Michael Kirwan, British Energy’s financial director, claimed, "As far as we are concerned, reprocessing is an economic nonsense and should stop straight away."

Lesson’s for Japanese Electric Utilities Japan’s electricity market is currently in the process of being deregulated, and a recent Ministry of Economy, Trade and Industry guideline calls for full-scale market liberalization to take place in 2005. Japanese electric utilities have already started to reduce costs in order to remain competetive in a deregulated market environment.

There are many lessons Japanese electric utilities can learn from British Energy’s current financial situation. For example, Japanese electric utilties currently have contracts with Japan Nuclear Fuel Ltd (JNFL) to reprocess 10,000 tons of spent nuclear fuel at a reprocessing plant under construction in Rokkasho, Aomori Prefecture. According to newspaper reports in Japan, the price of reprocessing one ton of spent nuclear fuel at the Rokkasho Reprocessing Plant will be four times the amount of reprocessing spent nuclear fuel at BNFL’s THORP reprocessing plant in the United Kingdom. Japanese electric utilities should heed British Energy’s warnings and cancel their reprocessing contracts with JNFL.