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 . . .