Monday, February 09, 2009

An Expensive Way to Boil Water

Another Scots Independent column...

In its first annual report published at the end of last year, the Scottish Government's Council of Economic Advisers recommended that an economic and CO2 abatement assessment be made of all the energy options open to Scotland. Sensible advice, moderately expressed, you might think, although that wasn’t how our esteemed friends in the unionist parties and the press saw matters.

The hooting, hollering and tyre-swinging began in earnest, with varying degrees of erudition being displayed along the way. Whatever – for anyone who knows that 2+2 = 4, there’s only one result which any study into the economics of nuclear could possibly come back with. However, if you were determined, while there’s a welter of superb analysis out there already, from Greenpeace as well as Scotland’s own Professor Steven Salter, there’s worse places to start than the most recent annual report and accounts for the recently taken over British Energy (BE).

Normally, when a company is taken over as a going concern, the price paid to shareholders exceeds the value of the assets. Given that BE total assets were deemed to be worth £12.4bn by company accountants and an operating profit turned in of £507m, there’s surely something unusual about the fact that √Člectricit√© de France (EDF) was able to buy BE for its asset value of £12.4bn.

Unless that profit figure is not all that it seems, it looks like EDF has taken the pants off the BE shareholders. Unfortunately, following BE’s bankruptcy and takeover by the Government, those shareholders were us, the taxpayers. However, it’s worth delving a little further into the figures before drawing a conclusion.

More curious is the reference in the accounts to 'non-current' nuclear liabilities, which in plain English means future decommissioning costs. On the company balance sheet, these amount to just £5.3bn, of which £2.5bn is for ‘back-end’ fuel costs. Which leaves the princely sum of only £2.9bn for decommissioning BE’s present sites.

Now, it’s important to note here that the costs of decommissioning the earlier Magnox stations have been hived off (to Magnox Electric Ltd – a part of BNFL which operates on behalf of the Nuclear Decommissioning Agency), which means that BE is effectively operating only ‘in the present’. This means that thanks to the taxpayer taking on all past liabilities, it only has to cover the decommissioning costs of its present sites.

The only reliable basis we have for estimating future decommissioning costs is based on our experience of decommissioning Magnox stations. According to its business plan, the NDA expects to have expenditure in 2008/09 alone of £2.9bn, the majority of which you’d expect to be going on site decommissioning. Planned expenditure is expected to be £2.8bn in both 2009/10 and 2010/11.

So, from this, we can see that BE has only set aside on its balance sheet as a liability the equivalent of just over one years decommissioning costs for Magnox. Looking at ongoing contributions, it paid just £22m in 2007 and £23m in 2008 into the Nuclear Liabilities Fund. Even allowing for the ‘sweeping up’ of future cashflows by the NDA, it’s clear that BE has been failing catastrophically to make adequate provision for future decommissioning costs.

The Magnox situation could be even worse for the taxpayer than it seems. That 08/09 clean up cost of £2.8bn represents £1.5bn of grant-in-aid from government and assumes that £1.3bn will be raised through commercial activity. However, even the NDA admits that this income is “uncertain”; and acknowledges that it is “expected to decline” due to “ageing facilities and fragile infrastructure”. In other words, if these increasingly creaky facilities have to shut down early for any reason, even if only temporarily, it’s ‘bye-bye’ commercial income and ‘hello’ increased taxpayer liability.

But back to BE, at the time of takeover, there was deemed to be just under £5bn shareholder equity in the company. If a more realistic account was being taken of present liabilities, that equity figure would have been wiped out many times over. Which begs the question – why would EDF want to take over such an operation? What could they possibly have been offered - apart from the prospect of being able to build new reactors on BE’s existing sites – to make this deal attractive?

The answer is simple. Unless the price of electricity is allowed to soar, profits and shareholder equity are dependent entirely on governments allowing for the real long-term clean up costs to be underestimated, hidden or hived off elsewhere. Just as Magnox failed to wash its face commercially, so too has the present generation of reactors. And if I’m still alive in 50 years time, it’ll give me no satisfaction to see the same financial trickery being deployed along with the promise that this time, with newer technology, it’ll somehow all be different.

Given England’s population and shortage of natural resources, there’s probably little alternative to new nuclear south of the border. We, on the other hand, with our surfeit of renewables and hydrocarbons, have a cheap, profitable and clean set of alternatives. Instead of fatuous scaremongering about ‘lights going out’, I wonder what it will take for the lights to go on for Scotland's nuke fanatics that it’s no more than a hideously expensive way to boil water?

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