British Energy, the UK's nuclear power monopoly, will likely be sold to Electricité de France this week in a deal valuing the company at close to $25 billion
. Though negotiations are ongoing and the parties are still apart on the precise value per share of British Energy (EdF thinks the 750p per share valuation a bit too rich), both sides are expecting to end the week with the largest transfer of wealth from Britain to France since Jane Birkin married Serge Gainsbourg. For some, the sale has aroused feelings of economic nationalism
. Unlike in the U.S., where we prefer to keep our state-owned enterprises at least nominally private
, the Europeans have no problem taking an active position in their largest companies. The British government owns 35 percent of British Energy, while the French governments owns close to 85 percent of EdF. Dieter Helm, an Oxford professor and energy expert, said the sale means "essentially handing the British nuclear industry to the French government." For a country looking to jumpstart their nuclear power industry, I don't think you could do any better than handing it over to the French. They've got nuclear in spades.
Britain's decision to move ahead with its nuclear modernization plan, which involves building 10 subsidy-free reactors in the next 25 years at a cost of $140 billion, is flawed for two reasons. Well, three, if you count handing it over to the French. I don't.
First, the plan will lead to a reorganization of the British electricity supply industry, effectively killing the only good thing Maggie Thatcher accomplished in her time as PM. The British electricity supply industry was restructured in the early 1990s, a move that paved the way for electricity trading on wholesale power markets and presaged our own move toward deregulation. Restructuring broke up the traditional vertically integrated monopolies, which controlled generation, transmission and distribution, and retail service, and required that generation companies sell their power in bulk through a combination of spot trading and forward agreements to utilities over independently owned wires. This was done to spur competition, to reduce the overhang of depreciating capital stock, and to make generation more efficient. British Energy, incidentally, is one of the largest participants in the wholesale markets - though their presence as an independent power producer is due largely to series of regulations and subsidies that look more like life support than red tape. That the bid-in price of nuclear energy runs close to £0.00/kWh no doubt makes for some serious liquidity problems in the wholesale markets.
EdF, which already has a significant presence in Britain, would control about 20 percent of the country's installed capacity after the sale goes through. The only way to sustain generation capacity of this size without subsidies is to re-integrate the company and rely on some form of rate-of-return regulation to push costs to the consumer base. In other words, an indirect subsidy paid for by the British people. Removing such a substantial amount of capacity from the British wholesale market will do more than ruin what little liquidity that currently exists. It will also raise entry barriers for independent power producers, and slough of investment in new capacity. With all this nuclear capacity about to come online, maybe the UK doesn't need another CCGT plant. But it does need to build a lot more offshore wind - about 33 GW worth - to fulfill its EU obligations. Market failure on the supply side will make this a lot tougher.
Second, and perhaps less talked about, are the significant water requirements of nuclear energy. Power stations generally account for about one third of all water consumed in Europe
, though nuclear power stations have water requirements as much as 83 percent greater
than those of other types of generators. In the Summer of 2006, much of Europe's nuclear capacity had to be taken offline because the heat wave roiling the Continent created drought-like conditions that made generating nuclear power extremely difficult. EdF, which generates more than 75 percent of France's electricity from its nuclear power stations, was forced to buy electricity on the spot markets to meet demand. Incidentally, after the British Energy sale goes through, there may not be a spot market big enough to pick up excess load in case this happens again. Water scarcity is not the only problem. Nuclear plants are also tied to severe water pollution and irradiation as well as ecosystem disruption as fish and plant life are exposed to water inflow pipes and heated outflow.
It's possible that if the deal moves forward this week, British and EU regulators may force some kind of competitive output arrangement. This would throw a bone to the independent power producers, but probably not the fish.