MorganEnergy

Here are a couple of follow-ups to stories that we have run here.

– E.On is apparently now free of anti-trust worries in electricity as the European Commission has accepted its promise to divest itself of 5,000 MW of generating capacity. EurActive has details.

– While doom and gloom is all too common in business these days, some people still have confidence: Westinghouse has set up a UK company in expectation of a bonanza from new nuclear plant build in that country. The move may also be connected with concerns about the vulnerability of US-based companies to law suits arising from nuclear accidents, as explained by this Guardian article.

Several UK papers are reporting (here, here and here) the story that Marks & Spencer are to go into the energy retail business. This probably means little outside of the UK, unless you happen to know ex-pat British women who insist on going back home to buy their underwear (M&S undies are legendary), but it is an interesting development.

M&S is one of the few retail chains in the UK that has made a success of selling premium product. They consistently get away with charging more for their clothes and food on the grounds that they provide better quality. And their electricity deal with Scottish & Southern Energy explicitly sources the power from hydroelectric stations. As I noted last week, Ofgem has found the UK consumers are overwhelmingly focused on price when they buy electricity. The idea of paying more for “green” power simply doesn’t appeal to them. But if any retail company can make a success of selling a premium energy product it will be Marks & Spencer.

Since February of this year the UK energy regulator, Ofgem, has been conducting an inquiry into the prices charged to retail customers. Their report was released today. The text is available online here. Ofgem has not found any evidence of price fixing by retailers, but it has raised a number of concerns about the market. Here are a few highlights.
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As expected, regulatory authorities in both the UK and EC will be taking an interest in the purchase of British Energy by EdF. Interestingly EdF has announced that any deal with Centrica, who are supposed to be taking a 25% stake in the deal, will have to be put off until after regulatory approval is granted. Presumably EdF is much more worried about Centrica’s potential dominance of the UK retail market than about its own potential dominance of the UK generation market.

Now wait for British MPs to tell Gordon Brown that the deal can’t go to Brussels unless some UK ownership is involved.

More information has been emerging about the Centrica deal to take a 25% share in the new nuclear power company being created by EdF from British Energy. EdF is buying BE through a subsidiary called Lake Acquisitions, and Centrica will take a stake in that company. According to EasyBourse:

The acquisition by Centrica would be at the same implied price per share as EDF pays for British Energy, subject to certain costs to be agreed. Under the deal EDF would retain control of British Energy through its 75% interest in Lake Acquisitions and be responsible for running all British Energy’s power stations.

Centrica’s 25% interest in Lake Acquisitions would give Centrica the right to offtake at least 25% of the uncontracted output of British Energy’s existing generation fleet. Profits of Lake Acquisitions would be distributed to EDF and Centrica in proportion to their equity interests. Centrica would also be entitled to participate in EDF’s nuclear new build activities in the U.K. on a 75/25 (EDF/Centrica) basis, with EDF leading the developments and being responsible for the building and operation of the new nuclear power stations.

It is also apparent that despite yesterday’s fanfares there are still rocks on which the deal might founder. Centrica may yet face an inquiry into the share of the UK generation market it controls with the addition of 25% of BE’s output. The Times talks about a “furious backlash” of patriotic Brits, none of whom have presumably been reading the newspapers over the past few months and have been taken completely by surprise by the news. And the Scots have finally woken up to the idea that British Energy is actually their national champion (BE’s head offices are in East Kilbride. Unfortunately for them, the SNP government has set itself firmly against any new nuclear build north of the border, so Alex Salmond is going to have to work very hard to make EdF think it worthwhile sticking around.

It appears that the EdF buyout of British Energy has finally happened, though much of what has happened remains somewhat murky.

As the BBC reports, there is now an expectation that Centrica will take some sort of stake in the nuclear generator. It seems likely that this will be in the form of an off-take deal for 25% of the output of the plants, plus 25% ownership of any new plants that are built.

Then there is the deal itself. The basic offer is for 774p per share, which is well up on original suggestions of 700p, but well short of the 1000p that BE initially said it was worth. However, there is an alternative deal on offer of 700p plus a “Contingent Value Rights” note (CVR). Yes, it is a derivative. EdF is asking BE shareholders to take a punt on the future value of UK energy prices. As the Telegraph points out, this is something of an uncertain deal.

Finally, it looks like EdF may not be the sole nuclear generator in the UK. It will definitely be building new plants at Hinkley Point and Sizewell but, as this Guardian report reveals, it will be selling some of the brownfield sites:

The company, which is 85% owned by the French government, has also agreed that it will sell off British Energy land at Bradwell, Essex, and more at either Heysham, Lancashire, or Dungeness, Kent, to rivals who are also interested in constructing and operating a new generation of nuclear stations.

So other companies may well decide to get in on the nuclear bandwagon. Indeed, RWE has already announced its intention to do so.

Several hundred years ago the French helped the Americans throw off the yoke of British Imperialism. These days, however, Frenchmen are rather less welcome over the other side of the Atlantic than they are on the other side of the Channel. The Wall Street Journal reports that Constellation Energy has accepted a takeover bid of $26.50 per share from Warren Buffett’s MidAmerican Energy Holdings even though they had a rival bid from EdF worth $35 per share. Constellation cites confidence in Buffett’s legendary financial acumen, immediate access to funds, and ease of obtaining regulatory approval as the primary reasons for their seemingly unusual choice. (Knowledge Problem has more links.)

EdF, as we have been noting for some time, is keen to acquire nuclear generation assets elsewhere in the world, and it is the nuclear issue that the WSJ thinks was the stumbling block for Constellation. America’s nuclear generation in the hands of garlic-eating foreigners? No thank you. But French money is rather more popular in Britain. The Times reports that the board of British Energy has accepted a revised bid for their company from EdF. An announcement is expected this week to coincide with the Labour Party Conference, so that Gordon Brown can welcome his French friends with a great fanfare. Nelson, Wellington and Henry V are doubtless turning in their graves, and William the Conqueror will be having a good laugh at their expense.

The great hope of the coal industry is that coal-fired power stations can somehow be modified to prevent them from releasing CO2 into the atmosphere, thereby rendering them climate-friendly. Germany’s RWE owns several coal-fired stations in the UK and Energy Business Review reports that they will soon be testing two new types of carbon capture technology. The first system, due to go live at Didcot this month, tries to remove CO2 from exhaust gases, while the second system, to be installed at Aberthaw next year, is more closely integrated with the combustion process. A lot of people will be very much hoping that these tests give positive results.

Party conferences are always a time for posturing and staking out of positions. Thus far the Labour Party has refrained from requiring Gordon Brown to fall on his sword, but with opinion polls predicting an electoral disaster of unprecedented proportions there is plenty of rushing around looking for policy positions that might revive the party’s flagging popularity.
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There have been a few rumblings this week that the EdF/BE deal is back on again. This has been going on for so long that I would not have even mentioned it were it not for the fact that the whole rationale for an EdF takeover is their expertise in running nuclear power stations, and Platts has just reported that 17 of their 58 nukes, representing some 29% of capacity, are currently offline for various reasons.