The value of nuclear power: UK gas generator ponders British Energy merger

How will power systems and markets develop in the upcoming wave of new generator construction? I have predicted mergers between fossil and nuclear power generators as gas prices rise and pressure mounts to put a price on carbon emissions. Well, one such merger may be in the offing. The Sunday Telegraph reports that just hours after a proposed £12 billion (C$24.4 billion) French buyout of the UK’s nuclear generating firm fell through, Britain’s biggest gas-based generating company announced it is will propose a merger with the nuclear company (see article). This would create a firm worth £22.5 billion (C$45.5 billion).

Two factors drive this decision, according to observers. First is rising power prices. Centrica, the gas-based firm, does not have enough generating capacity to fulfill obligations to its retail customers, and so must buy additional power from the wholesale market. This has become more expensive lately. Joining with British Energy (BE), the nuclear firm, would provide more than enough capacity.

The second factor is rising pressure on the UK government to introduce a windfall tax on power generators. Firms like Drax, Britain’s biggest coal-based generator, have earned massive profits because of the low cost of carbon emissions under the nascent European Emission Trading Scheme (see article). If the price of carbon doesn’t attain a meaningful level under the new, supposedly tougher, ETS rules, EU governments are under pressure to use a windfall tax to ensure carbon emissions do come with a meaningful price. (see 2007/06/20, 2007/08/15, 2007/10/10.)

A Centrica–BE merger would therefore reduce Centrica’s exposure to both carbon-emission and market-power prices (both of which would become inextricably entwined in the event of a windfall tax), while at the same time adding desperately needed generation capacity.

The problem is EDF, the French company whose £12 billion bid for BE was rejected, likely by a couple of investment funds holding interests in BE, Thursday night. EDF’s Plan B, in the event of the British Energy bid falling through, was to simply build four UK nuclear stations on its own. As the world’s biggest nuclear generating company, EDF is still seen as critical to fulfilling the UK government’s plan to add major new nuclear capacity. Will it have the stomach for another go at BE, especially considering that the same investment funds that scuttled the deal, claiming that EDF’s £12 billion cash offer undervalued BE, also own bits of Centrica?

And if not, what other player could provide the expertise and muscle vital to moving the nuclear plan forward?