French energy firm EDF has unveiled plans to build four new nuclear reactors in the UK after it agreed to buy British Energy in a £12.5bn deal.

Subject to shareholder and regulatory approval, EDF – 85% owned by the French government – will take over British Energy’s eight UK nuclear power plants.

In addition, British Gas owner Centrica said it was in talks to take 25% of the power generated by the enlarged group.

British Energy power plants generate about one sixth of UK energy supply.

But its reactors are old and many are due to be shut within 15 years.

Secure energy supply

The management of both firms said the tie-up was a “good fit” with little overlap.

Pierre Gadonneix, EDF chairman and chief executive, said the purchase of British Energy and investment in Britain’s nuclear future would help EDF to stick to its commitment of reducing carbon emissions by 2020.

He said: “This investment will help to secure less volatile energy prices for our customers for the long term.”

BRITISH ENERGY’S NUCLEAR PLANTS
Torness
Hartlepool
Sizewell B
Dungeness B
Hinkley Point B
Heysham 1
Heysham 2
Hunterston B

British Energy chairman Sir Adrian Montague said the deal was “good for shareholders, good for staff, good for the nuclear industry and good for the country”.

In an interview with the BBC, he played down concerns about the extent to which the UK’s energy provision would fall into foreign hands should the tie-up be successful.

“This country has had a history of being very open to foreign capital. All the investors in the energy industry have sustained jobs and investment in the UK,” he said.

“I think it’s more important to look at the strength of the supply we enjoy in the UK rather than who owns it.”

Terms of the deal

EDF’s all-cash bid values British Energy at 774p a share, 9p more than a previous bid which was rejected.

It has also proposed an alternative offer of 700p a share plus “one nuclear power note”.

The note changes in value with wholesale energy prices and power output levels from British Energy’s existing nuclear stations.

The French utility, which already supplies gas and electricity to more than five million customers in the UK, said it was committed to maintaining British Energy’s headquarters in East Kilbride in Lanarkshire.

It said that British Energy’s 6,000-strong workforce staff would benefit from the takeover.

Unions welcomed the announcement and the prospect of new jobs being created.

Prospect national secretary Anne Douglas said: “We know EDF and have worked with them constructively elsewhere in the UK.

“What we have to ensure now is that they understand that it is the staff that bring value to the company, more than any of the sites or grid connection points.”

Major coup

British Energy said that its largest shareholder – Invesco – which had played an instrumental part in scuppering a deal at the beginning of August, had agreed to accept the sweetened offer.

The deal still needs to be approved formally by British Energy’s shareholders and the relevant competition authorities, but the government, which owns a 36% stake in the firm, gave its support.

It signals a major step forward for its plans to revive the nuclear industry and reduce the UK’s dependence on oil and coal for its energy needs.

“£About 25 years ago, the supply of energy was organised along state lines, but now the industry is dominated by firms that operate across borders” Nuclear energy expert Malcolm Grimston

Prime Minister Gordon Brown said: “This deal is good value for the taxpayer and a significant step towards the construction of a new generation of nuclear stations to power the country.”

EDF already has in place plans to build four nuclear reactors at Hinkley Point in Somerset and Sizewell in Suffolk. The first is due to begin operating by the end of 2017.

In addition, once the deal is completed, EDF has agreed to the government’s request that it sells land to other nuclear operators to foster a competitive industry.

Separately, the Nuclear Decommissioning Authority is also looking for buyers for its sites at Wylfa on the island of Anglesey, Oldbury in Gloucestershire and Bradwell in Essex.

Cross-border

The deal is set to be controversial, BBC business editor Robert Peston says, because it will be seen by some as handing the UK’s nuclear future to a company owned by the French state.

Nuclear was always the future – as long as EDF does indeed spend the money needed it should be welcomed. Philip Charles Le Roux, Aldershot

Send us your commentsBut nuclear energy expert Malcolm Grimston told the BBC that it would be “a mistake” to see it as a French takeover.

“About 25 years ago, the supply of energy was organised along state lines, but now the industry is dominated by firms that operate across borders,” he said.

Even so, Centrica’s investment, which will cost it about £3bn, may placate some critics.

The deal with EDF is seen by Centrica as vital to reducing its dependence on imported gas.

EDF was set to buy British Energy in July this year, but the deal was called off on the eve of the announcement when shareholders protested that it was being sold too cheaply.

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British Energy’s biggest investor, Invesco, has called for the nuclear power generator to merge with British Gas owner Centrica, it is reported.

Neil Woodford, investment head at Invesco, which has a 15% stake in British Energy, said merger was the way forward for the two energy firms.

“Together they can work out a joint venture with EDF to build nuclear sites,” he told the Sunday Telegraph.

British Energy would not comment on the report.

In early August Centrica, the owner of British Gas, said it may consider a merger with BE.

Centrica also said then that it was talking to an unnamed third party about taking a minority stake in British Energy if that firm bought the nuclear operator.

French power group EDF had been poised to buy British Energy for £12bn ($22.4bn) but the deal stalled at the last minute because of disagreement over the price.

As well as its stake in British Energy which is worth about £1.5bn, Invesco also owns 5% of Centrica,

A takeover of British Energy, which is 35%-owned by the government, has been viewed as the best way of supporting the UK’s plans to build a new generation of nuclear plants over the next 20 years.

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British Energy has reported a 66% drop in quarterly profits, hit by falls in production from the group’s ageing nuclear power stations.

The firm made profit before tax of £101m for the three months to 29 June, compared with £296m a year ago.

British Energy said it had benefited from higher power prices but output fell because of plant closures.

The firm said that “advanced discussions” in connection with a potential offer for the firm continued.

A takeover of British Energy, which is 35%-owned by the government, is viewed as the best way of supporting the UK’s plans to build a new generation of nuclear plants over the next 20 years.

“We have continued to make good progress towards resolving the plant issues that have significantly impacted our performance in the year to date” Bill Coley, chief executive

However, the sale process has faltered.

France’s EDF had been poised to buy British Energy for £12bn but talks stalled over the price.

Centrica has also said it is talking to an unnamed third party about taking a minority stake in British Energy if that firm bought the nuclear operator. It has also said it would consider a merger with British Energy.

Plant problems

British Energy said boiler unit closures at Hartlepool and Heysham 1 plants had hit output and would cost more than thought to repair.

The company said the timetable for bringing the reactors back online was unchanged, but costs are now estimated to be around £115m in the 2008/09 financial year, compared with a previous estimate of £50m.

“We have continued to make good progress towards resolving the plant issues that have significantly impacted our performance in the year to date,” said chief executive Bill Coley.

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British Gas owner Centrica has seen operating profits decline 20% in the first six months of the year, following increases in wholesale gas prices.

Profits fell to £992m from £1.23bn a year earlier.

Despite the drop in earnings, Centrica said it would raise its dividend to 3.9 pence a share from 3.35p.

A day earlier Centrica said British Gas would increase gas bills by 35% with immediate effect in a bid to restore “reasonable profitability”.

Centrica chief executive says prices had to rise to support a sustainable business
Centrica said the results were “good” given the tough market conditions.

The company’s shares added 1.7% in London following the earnings news.
Centrica said it was obliged to raise gas prices in light of dwindling reserves and higher oil prices that had pushed up costs.

Centrica’s move to increase prices on Wednesday came after EDF Energy raised prices last week. Analysts say other firms are likely to follow suit.

Phil Bentley, managing director of British Gas told the BBC: “The price of gas for this winter, even though it’s fallen a little bit, it’s still double what was last year”.

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British Gas owner Centrica says it is raising gas prices by a record 35% and electricity prices by 9%.

The UK’s biggest domestic energy supplier said that the price hikes would take place with immediate effect.

It blamed “soaring wholesale energy prices”, but added that standard tariff prices would not rise again in 2008.

The move comes just a few days after rival EDF Energy put up gas prices by 22% and electricity prices by 17%, with other firms expected to follow suit.

Watchdog Energywatch said it believed the 35% gas bill rise was the biggest single increase in the price of a utility seen to date.

British Gas, which has 15.9 million customers, also announced that its profits for the first half of the year were down by 69% to £166m.

Centrica said the average dual fuel bill for a British Gas customer would go up by 25% – putting the average household bill at about £1,240. This is the second increase this year, after a 15% rise in bills in January.

“We very much regret that we have had to make this decision at a time when many household budgets are already under pressure,” said British Gas managing director Phil Bentley.

“The simple fact though is that we have entered an era of unprecedented high world energy prices.”

PRICE CHANGES FOR DUAL FUEL BRITISH GAS CUSTOMERS
Average direct debit from £968 to £1,240
Average standard credit from £1,055 to £1,317
Average pre-paid meter from £1,144 to £1,383
Source: British Gas, figures are based on a medium usage customer

A report prepared for Centrica earlier this month warned that annual average gas bills could rise from £600 to more than £1,000 early in the next decade.

Centrica said that wholesale gas prices in the coming winter would be up 89% on the previous winter.

It added that the UK was suffering from diminishing gas reserves, and estimated that the UK would import 40% of its gas this year compared with 27% last year.

The price of gas has risen in recent months as it is linked to the cost of oil, although oil prices have started to fall again in recent weeks. Energywatch described the link as “absurd”.

Fuel poverty

The move will heighten concern about rising levels of fuel poverty – defined as when a household spends more than 10% of its income on fuel bills.

“This is just profiteering from BG. How can they justify raising their prices by such an exorbitant amount again?” Mike, London

Send us your commentsAdam Scorer, of Energywatch, said this had become the most pressing issue for the government.

“People will be in fear of the winter,” he said.

He said the 35% rise was “without precedent” and many customers would react with disbelief to the price increase.

But British Gas’s Mr Bentley told the BBC that the firm would be working hard with its poorest customers to ensure their homes were energy efficient.

PRICE CHANGES FOR GAS MEDIUM USER
Average direct debit from £588 to £834
Average standard credit from £656 to £882
Average pre-paid meter from £712 to £923
Source: British Gas

The 340,000 customers on the Essentials account, aimed at low-income groups, will have prices frozen until April 2009.

Tim Wolfenden, head of home services at price comparison website Uswitch.com, said that for everyone else the major jolt would come in March when bills landed after winter gas use.

Inflation effect

The price rises will also draw extra attention to Centrica’s results which are published on Thursday.

British Gas said it was working hard to take costs out of the business and was on target to save £60m this year, but it could not absorb the impact of such high wholesale prices.

Mr Scorer said it people would want to know how British Gas owner Centrica was doing as a gas wholesaler.

And Steve Bloomfield, national officer at Unison, said Centrica had seen huge increases in profits as a producer and retailer of gas.

He said the government should take steps to reform the energy market.

“Customers and staff deserve a fairer deal,” he said.

PRICE CHANGES FOR ELECTRICITY MEDIUM USER
Average direct debit from £394 to £420
Average standard credit from £414 to £460
Average pre-paid meter from £432 to £475
Source: British Gas

Analysts have suggested that the price rises could have a significant effect on inflation.

If all the suppliers raised prices by about the same amount as British Gas it would add just less than 1% to the Consumer Price Index (CPI), which currently stands at 3.8%.

Analysts at Capital Economics and Deutsche Bank said in August, when CPI was already predicted to be 4.1%, it could breach 5% although price falls elsewhere could keep it below 5%.

RPI would increase from 4.6% to 4.8% as the weighting put on energy prices was different, they said.

News reported by The BBC

French energy firm EDF and British Gas owner Centrica are set to announce that they have bought UK nuclear firm British Energy, the BBC has learned.

The BBC’s business editor Robert Peston said EDF and Centrica will probably announce early next week they are paying more than £12bn for the company.

British Energy, which owns eight UK nuclear power stations, has been on the auction block for months.

The deal could raise as much as £4bn for the Chancellor.

British Energy has been part-owned by the UK government which now wants to sell its stake. The firm was privatised in 1996 but ended up being bailed out in 2002 by the government after running into severe financial difficulties.

One source told the BBC that “there’s a push to conclude a deal before the holiday. We hope it will be done in the next few days.”

“What will happen to the £4bn plus that would be received by the Department for Business when its stake is sold?” Robert Peston BBC business editor

British Energy’s board is insisting that EDF pay more than 750p a share, perhaps as much as 775p – which would value the company at well over £12bn – having rejected an offer of 680p made by EDF in May.

The deal is not yet finalised and could still be delayed.

But as and when the deal is done, up to a quarter of British Energy is likely to remain British.

Ownership

Centrica, owner of British Gas, is negotiating with EDF to be its minority partner in the acquisition and may end up paying around £3bn for a 25% stake in British Energy.

However the deal is likely to be controversial on several fronts, including whether EDF should be able to develop new power plants on existing British Energy sites.

There is also the issue of whether the UK’s energy needs should be placed in the hands of a firm run by a French company.

Another key concern is what will happen to the money that the Department for Business is tipped to make when it sells its share in the nuclear firm, and how that money will be invested.

News reported by The BBC