HL Deb 28 November 2002 vol 641 cc907-16

3.28 p.m.

Lord McIntosh of Haringey

My Lords, with the leave of the House, I shall now repeat a Statement made in another place by the Secretary of State for Trade and Industry about British Energy:

"British Energy operates eight nuclear power stations in the UK, supplies over one-fifth of our electricity and employs 5,200 workers in Britain.

"In May this year the company in its preliminary results announced a pre-tax, pre-exceptionals, profit of £42 million in its UK and North American operations but an overall loss to its UK operations of £41 million. None the less, the company chose to maintain its dividend, paying out £48 million to shareholders.

"During the summer, British Energy decided to attempt a bond issue in the United States. It was unsuccessful. On 13th August, one of the reactors at the company's Torness station was taken out of service due to unforeseen problems—reducing the company's income by £56 million.

"The next day company executives told investors that there were no immediate cash flow problems.

"Throughout the summer, British Energy engaged in discussions with BNFL to renegotiate the terms of its contracts. These were entirely commercial discussions between the two companies.

"At the beginning of September, British Energy realised that its financial problems were far greater than it had thought and that any conceivable deal with BNFL would not be enough to meet its requirements.

"On 4th September the company wrote to inform me of a significant worsening of the company's financial position and liquidity problems. It said the board would have to decide, on legal advice, whether it could continue to meet its liabilities and therefore trade legally. And it asked for government help.

"The next day I announced that the Government were entering into discussions with the company. On 9th September I announced a loan facility of £410 million to support its trading operations both in the UK and in North America.

"On 26th September, after a further request from the company, the Government decided to extend the loan facility until 29th November and increase it to £650 million. This was to give the company sufficient time to clarify its financial position and to come to a clear view on its future options.

"Both the initial loan and its extension were notified to the European Commission under state aid rules, and I can tell the House that the Commission announced yesterday that it has approved the loan. I offered that loan because it was the best way of securing the safety of the nuclear power stations and the security of electricity supply to the grid and consumers. These remain my overriding objectives.

"British Energy has submitted a plan to the Government for the solvent restructuring of the company. We, and our financial advisers, have assessed its implications and I can announce to the House that the Government have agreed to play their part in allowing the company to attempt solvent restructuring.

"Both the company and my department have made statements to the Stock Exchange today; I have placed copies of both in the Libraries of the House and in the Vote Office.

"The company has announced that it will continue to make payments to a fund which is used to pay for costs of decommissioning its power stations; give the fund £275 million of bonds in the company; and surrender to the fund 65 per cent of its available cash each year.

"The Government will underwrite these arrangements to ensure safety and environmental protection. In addition, we have recognised that if this restructuring is to work, the Government themselves must contribute significantly to the company's £2.1 billion of historic nuclear fuel liabilities managed by BNFL which extend to 2086. The cost to the Government will average £150 million to £200 million per annum for the next 10 years and fall thereafter.

"If the company does very well, surpluses from BE's contribution to the decommissioning funds will help meet these costs. But I also intend to look at how these contracts are managed as part of the creation of the Liabilities Management Authority.

"In addition, BNFL is today announcing that it will agree new contracts with British Energy for fuel supply and for spent fuel services in respect of future nuclear electricity generation.

"If the company's proposed restructuring is to succeed, the existing creditors will have to accept a temporary freeze on payments and subsequently a significant writedown in the value of what they are owed. Secondly, the company will have to complete the sale of all its North American operations. And, thirdly, the company will have to implement the new trading strategy it has announced today.

"Agreement to this must be achieved by the middle of February.

"The Government are prepared to continue to fund BE's operations while the restructuring plan is agreed and implemented. The existing credit facility will be extended to 9th March with the size of the facility remaining unchanged at £650 million.

"Of the existing facility of £650 million, £382 million had been drawn down by yesterday. Under the proposal, the money will be progressively repaid as the financial situation improves. And in the event of administration we have taken security to protect the interests of the taxpayer and rank above other creditors.

"I also intend to bring forward legislation shortly to enable me to carry forward the Government's part of the proposed restructuring or, if it fails, to acquire the companies or their assets.

"This proposal for solvent restructuring will of course need state aid approval by the European Commission. Once the company has reached agreement with its financial creditors we will notify the plan to the Commission.

"I said in September that, if possible, we would look to a solvent restructuring. However, we did not rule out that the company might decide to go into administration.

"We have therefore prepared detailed contingency plans for administration in discussion with all the key responsible regulatory bodies to ensure that whatever happened nuclear safety and security of supply would be maintained.

"Let me stress that if British Energy were to go into administration all its nuclear liabilities would fall to government. We cannot just walk away from them; no responsible government would. This is the reason why the situation with British Energy is different from any other generator.

"I would like to take this opportunity to thank the staff at British Energy. Their skill and dedication is essential to ensuring nuclear safety. This has been an unsettling time for them but whatever happens nuclear power stations will continue to generate electricity and will continue to employ staff. Pension entitlements will be met. Trade suppliers will be paid. And customers' lights will stay on.

"I understand that today's news will give little comfort to British Energy's financial stakeholders. But they too must take their share of the pain if the company is to survive. The stakeholders now need to decide whether they are willing to support solvent restructuring. If they are not, the Government are fully prepared if British Energy decides that administration is the only option.

"Today the company has announced that Robin Jeffrey is stepping down and that Adrian Montague will succeed him as chairman. Mr Montague is an experienced executive who brings key business experience, from both the public and private sectors. It is clear there have been management failings and I think it is right for the company to be seeking to strengthen the management learn at this critical time.

"I have set out today the limits of what the Government are willing to do to support solvent restructuring. It is now up to the company, its new management and its financial stakeholders to determine the future of British Energy".

My Lords, that concludes the Statement.

3.37 p.m.

Baroness Miller of Hendon

My Lords, I thank the Minister for repeating the Statement made in the other place by his right honourable friend. the Secretary of State for Trade and Industry. It has at least given Parliament the chance to question Her Majesty's Government over a decision taken almost three months ago which committed £650 million of taxpayers' money to bailing out British Energy, although, as we see it, occurring at the last possible parliamentary moment before a decision by the Government had to be made.

In a fairly detailed Statement, I find it somewhat strange that no mention is made of the climate change levy. Does the Minister riot consider it absurd that Her Majesty's Government claim that imposing the climate change levy is part of their strategy to meet our climate change commitments? Since nuclear power is the principal energy source that does not generate CO2 emissions, this is really an absurd contradiction. The fact is that British Energy will always struggle until the climate change levy is removed.

Does the Minister agree that the right answer would be to abolish the climate change levy, an arbitrary tax that unfortunately does not play a part in addressing the climate change problem? Does he further agree that it could be replaced with a single economic instrument which could be an emissions trading system or a carbon tax? Is the Minister aware that this is not just a view that I mention as a member of my party but that of the Royal Society which only two weeks or so ago issued its policy document on this very important matter? Can the Minister tell the House why Her Majesty's Government do not accept these arguments by the Royal Society, which were strongly and with authority put in the paper that it issued? Does the Minister agree that the approach I have just indicated would improve the position of both nuclear and renewables compared with fossil fuels? Or is the problem that the Treasury perhaps would not like it?

The Statement indicates that BNFL is announcing today that it will agree new contracts with British Energy for fuel supply and for spent fuel services in respect of future electricity generation. But is it not a fact that, some time ago, British Energy reached agreement with BNFL on terms that the department agreed, only to have the agreement blocked by the Treasury?

Does the Minister realise that part of the problem is the Government's muddled approach to the whole of the nuclear industry, with Ministers not singing from the same hymn sheet? Does he recall a statement on British Energy made by the Minister of State as recently as 17th November to the Sunday Times? He said: We need that supply, so come what may, nuclear generation will continue". Only eight days later, we read in the Western Mail that the Secretary of State for Wales, the former energy Minister, wants to shut nuclear power stations. Perhaps the Minister can tell us what is the true position.

In the Statement, the Minister told the House that British Energy has submitted a plan to the Government regarding the solvent restructuring of the company. The Secretary of State said that she and her financial advisers have examined and accepted it. Of course, we hope that it is successful, but as we know that the security of supply is of the most overriding importance, is it consistent with the new electricity trading arrangements, NETA? The Minister who made the Statement is not the Minister who answered a Question on Monday on electricity supply, when that very matter arose. The noble Lord, Lord Sainsbury, said that he was totally satisfied that there would be no problem with supply. Can the Minister tell us whether that is still the position?

Perhaps some consideration should now be given to the remit of the regulator. Much as we like electricity costs to be as low as possible for consumers, we also want an electricity supply and an electricity generating industry. Are the new financial commitments mentioned in the Statement included in the new, huge borrowing requirements announced by the Chancellor of the Exchequer yesterday in the other place? Now that the Secretary of State has made it clear that she will not let British Energy go into administration, what is the assessment of the cost to the taxpayer?

The problems of British Energy are undoubtedly due to the fall in prices paid to the generator, which have not been helped by NETA.

I am terribly sorry, but I must tell the Minister that if he was confused by anything that I said, so was I. because I read page seven of my brief before page six, which is absolutely appalling. He must have thought it rather strange that all of a sudden I mentioned N ETA out of all context. Did noble Lords notice?

Noble Lords


Baroness Miller of Hendon

Well, my Lords, it is really bad news if, at the end of the day, I make a mistake like that. Perhaps I should not have brought it to the Minister's attention. I shall not read that page again, unless the Minister would like me to, but I think I ended up by saying what I meant to end up by saying, which is that perhaps the remit of the regulator should now be considered. Much as we want electricity costs to be as low as possible, we definitely want continuity of electricity in the generating industry. I apologise again to the Minister for my eagerness to finish my response to the Statement.

3.44 p.m.

Lord Ezra

My Lords, I, too, thank the Minister for repeating this important and in many ways disturbing Statement. I accept that in view of the importance and size of British Energy, which supplies more than 20 per cent of the electricity needs of the country, in these difficult circumstances there either had to be a restructuring or the Government had to take over responsibility for running the assets and continuing to supply electricity from them. Those were the two options described in the Statement.

However, I should like to ask the Minister a number of questions. First, it was implied in the first part of the Statement that British Energy should have taken action earlier and that, had it done so, the solution could have been less costly. Is that the Government's view, as is implied in the Statement? Apart from that, the major external factor—to which the noble Baroness, Lady Miller, referred—has undoubtedly been the massive fall in wholesale electricity prices, which has affected not only British Energy but other major generating companies. Incidentally, that big reduction in wholesale electricity prices has only in part been passed on to the retail sector.

The reason for the fall in those prices has undoubtedly been the operation of the new electricity trading arrangements, NETA. Does the Minister agree that, as the noble Baroness pointed out, it is time to review the operation of NETA, which seems to have introduced a degree of instability in the marketplace? The question of security of supply is obviously closely tied to that question. Earlier this week, I asked the Question to which the noble Baroness referred and received a reassurance from the noble Lord, Lord Sainsbury, that electricity reserves were adequate. I beg to differ; they are probably inadequate to meet exceptional circumstances. But whatever may be the case, should we not review the regulatory arrangements to ensure that a reserve capacity is maintained?

Under the previous, much criticised Pool arrangements, there was such a provision. There is no longer. The Government have said that they will keep the electricity supply situation under review, but what will they do if the review shows that a shortage is likely to develop? From where will they get the reserve capacity, if it has not been previously built up and maintained?

Apart from the question of reserve capacity, to which nuclear and other generators must contribute, there is the big issue of the future of the nuclear industry itself. We hope that that will be clarified in the forthcoming energy review. Does the Minister agree t hat it is vital that a decision should then be reached on the future of the nuclear industry? Either we continue with a nuclear industry of the size that we have now—in which case all the problems of the cost of construction, decommissioning and dealing with waste and security issues must be identified and resolved—or, if that is not to be done, we must be clear what other forms of energy are to be developed that will have a similar impact on the environment.

So the issue does not simply affect a single electricity generating company. It raises wide questions of energy policy, security of supply and, above all, the future of the nuclear industry itself.

3.49 p.m.

Lord McIntosh of Haringey

My Lords, am grateful to the noble Baroness, Lady Miller, and the noble Lord, Lord Ezra, for their reception of the Statement. I say straightaway to the noble Baroness, Lady Miller. that I was not at all worried by the reversal of the order. I listened to Mr Tim Yeo's intervention in the Commons. I took careful notes. I noted the seven points that he made. The fact that the noble Baroness took one of them out of order does not worry me in the least. At least they were the same points. which is helpful. A co-ordinated Opposition! I am glad to hear it. Unfortunately, it does not sound as though the noble Baroness, Lady Miller, paid attention to the very effective answers which the Secretary of State gave to Mr Tim Yeo. The arguments that were used do not carry much weight.

The noble Baroness asked about the climate change levy. She said in effect that we should be moving over to a carbon tax or to trading permits. The climate change levy and the alternatives of carbon tax and energy trading permits will, of course, be considered in the White Paper that will be published in the new year. However, the Secretary of State made it clear that this is not a carbon tax. It is intended as an energy efficiency incentive for the whole energy industry and all its customers. The noble Baroness and Mr Yeo can hardly expect us to make a change for just one company.

The noble Baroness repeated the allegation that there had been a deal between British Energy and BNFL that had been blocked by the Treasury. That is not the case. It is a commercial deal between the two companies in which the Government were not involved. She repeated the question about the role of the obligations in yesterday's announcement of the Pre-Budget Report and the borrowing requirement despite the fact that the Secretary of State answered clearly that those obligations could be and would be maintained within the departmental expenditure limit of the Department of Trade and Industry and would, therefore, have no effect on the figures in the Pre-Budget Report.

Security of supply is a legitimate concern. The noble Baroness, Lady Miller of Hendon, and the noble Lord, Lord Ezra, asked me about it. I shall give the facts of the matter. The capacity of the generating industry is 65 gigawatts. The peak demand in the winter of 2000–01 was 55 gigawatts, which leaves a margin of 17.5 per cent. That is just about the same margin as there has been for many years. It has been lower in one or two years and more like 20 per cent for most years. Now, as opposed to the position in the past, there are seven gigawatts of capacity in power stations that are mothballed and could be brought back into operation. We are always concerned about security of supply, and we never relax that concern. However, the arrangements and the capacity that we have and can bring into use are adequate for the purpose.

The noble Baroness repeated the allegation that the climate change levy was generated by the Treasury's need for revenue. The climate change levy is revenue neutral. She asked for an assurance that we would not let British Energy go into administration. That is a matter for the company, it has an obligation to reform its managerial activities and persuade its bondholders, stakeholders and shareholders that it is in their interest not to go into administration. If it fails to do that, there is a threat of administration, and the Statement made that clear.

I was surprised by some of the comments about the new electricity trading arrangement. I had thought that it was a success for the Government and a success for the Utilities Bill that I was proud to take through the House a couple of years ago with the help of the noble Baroness, Lady Miller of Hendon, and the noble Lord, Lord Ezra. It was a success that retail prices were brought down by the new electricity trading arrangement. That was what we tried to do. The old pool arrangements were absurd. They were contradictory and led to excessive profits for some of the energy companies. That is not to say that we do not keep NETA under review. We support changes that will reduce barriers to consolidation and the balancing mechanism. Again, such matters can be considered when we produce our White Paper in the new year.

The noble Lord, Lord Ezra, raised a particular point about whether British Energy should have taken action earlier. He heard the criticism in the Statement of some of the actions of British Energy earlier this year. They are matters for the management of the company, not the Government, but the Secretary of State made the Government's views sufficiently clear. I have answered the noble Lord's questions about the fall in prices due to NETA and about the review of NETA. His broader question about the future of nuclear energy is, of course, a matter for the White Paper to be published in the new year.

3.55 p.m.

Lord Howie of Troon

My Lords, I heard the Statement with great interest. As my noble friend knows, I have been an advocate of nuclear energy for a long time—since my early life as a civil engineer, when I used to design nuclear power stations.

I shall pick up a point raised by my noble neighbour—although she sits on the other side of the House—Lady Miller of Hendon relating to the climate change levy. No doubt, the climate levy had positive features, but my noble friend must know that the form of energy that has least impact on the climate is nuclear energy. The imposition of the climate levy on nuclear energy is, therefore, not only mistaken but daft. I have been in this House for 25 years or so and in another place for longer, and I am used to seeing governments do things that are unnecessary and daft. It is the way of things. However, to impose the levy, which deals with climate change, on an industry that does not change the climate is dafter than daft.

I do not blame my noble friend. He is one of my oldest friends in politics. However, he should suggest to those who are in authority that they should pull themselves together and have a good look at the matter. If they will not listen to what I have said on the matter, they should, at least, listen to what the noble Baroness, Lady Miller of Hendon, has said.

Lord McIntosh of Haringey

My Lords, I have already made it clear that the imposition of the climate change levy on British Energy is not being done because we think that British Energy produces byproducts that damage the climate. That is not the purpose of the climate change levy. The levy is an energy efficiency incentive for the whole energy industry and for all its customers. It is one of a range of possibilities that can be considered in helping the Government and the country to achieve our objectives under the Kyoto arrangements.

We have not ruled out the alternatives such as the carbon tax or energy trading permits. We will consider those matters in full in the White Paper that will be produced early next year.

Lord King of Bridgwater

My Lords, the gravity of the Statement is underlined by the fact that, as I understand it, the Government have just taken on a further commitment of £2 billion over the next 10 years. The costs in other areas may be substantially greater.

Has any agreement been reached to change in any way the previous programme for the closure of ageing or obsolete nuclear power stations, including, in particular, advanced gas-cooled reactors? Are there any proposals on that, or is the policy of maintaining nuclear power in this country on the programme of British Energy to be sustained?

Lord McIntosh of Haringey

My Lords, existing programmes for closure of nuclear installations are not affected by the proposals in the Statement.

Lord Oakeshott of Seagrove Bay

My Lords, I listened carefully, but I am not sure that I heard the Minister explain how the Government would underwrite the arrangements for the proposed solvent restructuring. What is the limit of the underwriting commitment, expressed in an amount and in time?

Lord McIntosh of Haringey

My Lords, the figures are contained in a statement made by the company and the Government to the Stock Exchange, which is available in the Library of the House. I think it better that I should rely on that rather than seek to find the figure and run the risk of making a mistake.

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