Thursday 15 November 2007

British Energy Fallout Zone (2) – Double or Quits

BE’s optimism is unbounded: they report being in talks with 10 suitors for carrying out next-generation nuclear power plant developments. Surprising ? Not really: talk costs nothing, and everyone remembers the bonanza that was the government’s cack-handed ‘rescue’ of BE in 2002-3, when many companies made a lot of money.

In particular, BE was required by the government to sell forward a huge chunk of electricity – at the absolute bottom of the market, the usual Gordon Brown trick. A nice illustration of this is in the graph above from this week’s Report: the appropriately Brown lines show the prices at which BE sold its power, reflecting the low-price forward contracts; the blue is out-turn market prices for 1-year contracts (spot prices were frequently even higher). Canny Centrica was the major beneficiary of this extraordinary windfall.

When these forced sales expired in 2005, BE carried on selling forward. Apart from luckily having called last winter correctly, the results are not impressive, as we can see. Undeterred, they have continued with this strategy: the graph shows what they’ve done for the current year and the report boasts of a large chunk sold for 08/09 variously at £32 (sic) and £42 / MWh, plus some extending out as far as 2013 ‘to protect against lower price scenarios’.

But in BE’s position, is a lower price scenario the real problem ? Recalling yesterday’s post, it is clear that if ‘legacy issues’ persist (or worse), BE may be unable to deliver from their own output. Now UK capacity is tight, and large-scale BE unreliability can move the market, tending to drive spot prices up - making it even more painful to deliver at low forward prices using replacement power purchased at market price. If you have to deliver at 32 ... and you’re short ... and the market goes back up to 60 ... ouch!

BE are playing double-or-quits here. The lights are on, but is anyone at home? Oh, hang on, now the lights are flickering . . .



Anonymous said...

The nuclear waste problem and the heating-our-houses problem could be solved at a stroke by giving us each a bit of nuclear waste to use as a heat source for our houses. Of course, we'd all needs some lead shielding, but we could knock that up from the batteries in our cars which we'll no longer need because of the lack-of-petrol problem. Easy-peasy.

Nick Drew said...

dearime, you are just the man Malcolm Wicks wants to meet

and you look so healthy on it ... positively glowing

Mark Wadsworth said...

When they sell in advance do they get cash up front, or is it like a normal futures contract?

Nick Drew said...

Mark - it's normal in that sense: cash flows after electricity has been delivered. (That was Enron's basic problem: they were marking this type of big, long-term forward contract to market, and hence taking them into P&L, but the cash wasn't due for years to come.)

Would tend to be called 'forwards' rather than 'futures', because (a) they are 'physically settled', not CFDs, i.e. actual electricity changes hands (followed by the £); and (b) 99.9% are negotiated OTC rather than exchange-traded.

Old BE said...

Where does the public sector find these "managers" who manage to do the opposite of what's sensible every time?

And how on Earth do such idiots get into government? Is the political barrel really that empty of talent?

Nick Drew said...

Ed - BE is an excellent case-study, in 7 easy steps.

1. 2002: BE is run into the ground by a management with only half an eye on the ball, knowing full-well the govt will have to bail them out

2. Govt amazed & appalled, has no idea what to do, so appoints armies of consultants and advisers ...

3. ... who deploy the usual battalions of bright 22-year-olds

4. Hordes of very sharp vultures gather, whispering helpful suggestions that will get everyone off the short-term hook (rarely difficult in a world where long-term deals are the norm)

5. Govt holds breath while EU decides whether to approve the resulting 'package' (like, err, the French are going to veto a nuclear bail-out ?? we know the answer to this*)

6. Couple of scapegoats found & paid off, everyone else goes back to making money out of the taxpayer and electricity consumer

7. Job's a good'un, massive fees paid, trebles all round. Chickens prepare to circle for a few years before coming home to roost (see blog for details)

Cynic ? me ?


James Higham said...

The arrogance of being amateurs with a bit of knowledge playing a game they do not understand is what's apparent from poring over that graph.

Anonymous said...

ND: nicely put! You're not the only cynic. The Committee of Public Accounts also summed it up nicely with:

The Department sought to share the cost of the restructuring with the Company’s shareholders and creditors. The shareholders, who would have received nothing in
administration, agreed to exchange 100% of the existing equity for 2.5% of the equity in the restructured company. The Company’s major creditors took 97.5% of the equity in the restructured Company. By February 2006 this holding was worth £3.9 billion, far more than the creditors would have received under administration and without any responsibility for meeting the nuclear liabilities. ... British Energy now poses a significant risk to the taxpayer but the Department plays no formal role in approving the Company’s commercial strategy.

To be fair, the increases in gas/electricity prices that pushed BE value up weren't forseen back then, but still it was a good deal for some when the alternative the govt faced was shutting the AGRs down, or properly renationalising them.

Old BE said...

ND, sounds about right. I thought the original plan with privatisation was that the state could wash its hands of any "legacy" financial responsibility, but this govt seem to refuse to let quasi-state companies fail in the usual way.

I'm sure it's not good.

Nick Drew said...

James - yes, and these amateurs are in the game with a line of credit provided by ... us

Mr E - I accept no-one was forecasting even £40, still less £60: but I recall this period all too clearly, and at £16 truly the only way was up (see
as was widely understood at the time (see the knowledgeable punts being made then on Drax etc).

The last sentence from your extract is crucial: it makes the govt underwriting a 1-way bet for BE, which gets to Ed's point.

But "to let quasi-state companies fail" when they are a pile of nuclear liabilities like BE, is not really on. So the quid pro quo needs to be rather different, in my view.

Anonymous said...

We are light years behind when it comes to nuclear power, I don't think it is an area we will ever excel at because it is hated so much.

CFD Ed said...

Looks like they are using Nick Leeson economics, with Gordon Brown egging them on...

Anonymous said...

The nuclear industry is quite unique in that govt absolutely cannot let a nuclear facility go bankrupt, so the risk/reward balance is dangerously skewed. Putting my socialist tin-hat on here, there is a strong argument for the nuclear industry being kept nationalised, but for the fact so many uneconomic nuclear power stations got built under that regime, where vested interests had control (not to say the vested interests have lost control now - witness the BE rescues).

Seems to me the proper regulated capitalist approach would be that before a nuclear power station could be first fired up, the owner should fully fund (or securely insure) the station worst-case decommissioning fund - we are talking about a billion here to cover dismantling a broken nuclear core. That way we could let the operator go bankrupt at any time, without much taxpayer cost. The current approach of paying into a fund thru station lifetime just isn't good enough.

But the nuclear industry, and its inside-government hangers on, would go ballistic if someone seriously put forward this sensible suggestion! It would be dead-stop for nuclear power.

Thinking about the AGR situation now, taking risks with old AGRs may bring profits to BE, but if there is a core collapse BE go broke and the govt pick up the tab. Even the managers and workers come out well (as long as it was contained in the core), they would have to be employed by whoever the govt hired to clear up the mess - better job security all round compared to shutting a station down earlier!

We are so dependent on the NII (effectively a regulator, though not in name) defending the public interest. But I'm not sure they are immune enough from the vested interests - after all the inspectors themselves come out of the industry.

Nick Drew said...

Ellee - you may have the French in mind; but they are storing up troubles of their own (which I persist in predicting they will seek to foist on the rest of us - see my link @ 10:51 above)

Phil - the lessons never seem to be learned, do they?

Mr E - anything socially important with back-end liabilities on that scale, be it nucs or pensions, inevitably gets political. There are signs the French are preparing to show their hand on their end-game for the current generation of liabilities, which may sober people up a bit.

Anonymous said...

aaaa片, 免費聊天, 咆哮小老鼠影片分享區, 金瓶梅影片, av女優王國, 78論壇, 女同聊天室, 熟女貼圖, 1069壞朋友論壇gay, 淫蕩少女總部, 日本情色派, 平水相逢, 黑澀會美眉無名, 網路小說免費看, 999東洋成人, 免費視訊聊天, 情色電影分享區, 9k躺伯虎聊天室, 傑克論壇, 日本女星杉本彩寫真, 自拍電影免費下載, a片論壇, 情色短片試看, 素人自拍寫真, 免費成人影音, 彩虹自拍, 小魔女貼影片, 自拍裸體寫真, 禿頭俱樂部, 環球av影音城, 學生色情聊天室, 視訊美女, 辣妹情色圖, 性感卡通美女圖片, 影音, 情色照片 做愛, hilive tv , 忘年之交聊天室, 制服美女, 性感辣妹, ut 女同聊天室, 淫蕩自拍, 處女貼圖貼片區, 聊天ukiss tw, 亞亞成人館, 777成人, 秋瓷炫裸體寫真, 淫蕩天使貼圖, 十八禁成人影音, 禁地論壇, 洪爺淫蕩自拍, 秘書自拍圖片,

做愛的漫畫圖片, 情色電影分享區, 做愛ㄉ影片, 丁字褲美女寫真, 色美眉, 自拍俱樂部首頁, 日本偷自拍圖片, 色情做愛影片, 情色貼圖區, 八國聯軍情色網, 免費線上a片, 淫蕩女孩自拍, 美國a片, 都都成人站, 色情自拍, 本土自拍照片, 熊貓貼圖區, 色情影片, 5278影片網, 脫星寫真圖片, 粉喵聊天室, 金瓶梅18, sex888影片分享區, 1007視訊, 雙贏論壇, 爆爆爽a片免費看, 天堂私服論壇, 情色電影下載, 成人短片, 麗的線上情色小遊戲, 情色動畫免費下載, 日本女優, 小說論壇, 777成人區, showlive影音聊天網, 聊天室尋夢園, 義大利女星寫真集, 韓國a片, 熟女人妻援交, 0204成人, 性感內衣模特兒, 影片, 情色卡通, 85cc免費影城85cc, 本土自拍照片, 成人漫畫區, 18禁, 情人節阿性,

Anonymous said...

情色電影, aio交友愛情館, 言情小說, 愛情小說, 色情A片, 情色論壇, 色情影片, 視訊聊天室, 免費視訊聊天, 免費視訊, 視訊美女, 視訊交友, ut聊天室, 視訊聊天, 免費視訊聊天室, a片下載, av片, A漫, av dvd, av成人網, 聊天室, 成人論壇, 本土自拍, 自拍, A片, 愛情公寓, 情色, 舊情人, 情色貼圖, 情色文學, 情色交友, 色情聊天室, 色情小說, 一葉情貼圖片區, 情色小說, 色情, 色情遊戲, 情色視訊, 情色電影, aio交友愛情館, 色情a片, 一夜情, 辣妹視訊, 視訊聊天室, 免費視訊聊天, 免費視訊, 視訊, 視訊美女, 美女視訊, 視訊交友, 視訊聊天, 免費視訊聊天室, 情人視訊網, 影音視訊聊天室, 視訊交友90739, 成人影片, 成人交友,

免費A片, 本土自拍, AV女優, 美女視訊, 情色交友, 免費AV, 色情網站, 辣妹視訊, 美女交友, 色情影片, 成人影片, 成人網站, A片,H漫, 18成人, 成人圖片, 成人漫畫, 情色網, 日本A片, 免費A片下載, 性愛, 成人交友, 嘟嘟成人網, 成人電影, 成人, 成人貼圖, 成人小說, 成人文章, 成人圖片區, 免費成人影片, 成人遊戲, 微風成人, 愛情公寓, 情色, 情色貼圖, 情色文學, 做愛, 色情聊天室, 色情小說, 一葉情貼圖片區, 情色小說, 色情, 寄情築園小遊戲, 色情遊戲, 情色視訊,