British Energy sale a poor deal, MPs conclude

UK nuclear energy deal draws PAC scrutiny as DECC sells a 36% British Energy stake to EDF without reactor commitments, amid energy security risks, Ofgem warnings, carbon price floor debates, and Hinkley Point timelines.

The government's sale of British Energy to France's EDF was a good price but a bad deal, an influential committee of MPs have concluded.

The state received £4.4 billion for its 36 per cent stake of the nuclear operator as EDF's buyout of British Energy unfolded, out of a total £12.5 billion price tag – thanks to peak energy prices at the time of the contract, says the Public Accounts Committee (PAC). But the deal has done little to address the danger of energy shortages from 2016 as demand rises and obsolete power stations are retired.

The ostensible purpose of the sale was to ensure the building of new nuclear power stations, without public money, to help plug the looming energy gap. But the deal with EDF did not include any binding commitment to build nuclear reactors, British nuclear policy either with or without a subsidy. And the Department for Energy and Climate Change (DECC) also failed to establish whether the supplier had ever built a nuclear power station without public money in the past. Even worse, Decc neither knows how much nuclear generating capacity will be required to meet future energy needs, nor does it have convincing contingency plans.

"It is of concern, to say the least, that the department does not know how much nuclear generating capacity will be needed to meet our future energy needs," said Edward Leigh, the PAC chairman. "This committee is not convinced by the department's reliance on the market and a rapid acceleration in renewable energy to fill any gaps in future energy supplies."

EDF is planning to build four nuclear power stations by 2025, and an EDF nuclear deal underscores this expansion in its wider portfolio. The first, at Hinkley Point in Somerset, is scheduled to be up and running in 2017. But the timing relies on planning approval from the Infrastructure Planning Commission and clearance of Areva's EPR reactor by the Health and Safety Executive by 2011.

Logistics are not the only challenge. The energy industry has warned repeatedly that massive infrastructure investments do not make commercial sense, and last month Ofgem published a damning report on Britain's energy market, highlighting UK electricity bill pressures that have grown, with suggested remedies ranging from putting a floor under the carbon price to creating a centralized "national buyer" to co-ordinate investment.

The PAC says the government has simply not done enough work to ensure that Britain has sufficient power regardless of EDF's ambitions and French union protests over its privatization pressures on operations. "The department only had an outline strategy for filling the energy gap if EDF did not build new nuclear power stations," the report says. But the market is not guaranteed to deliver either nuclear power or the six-fold increase in renewable capacity needed within the next decade.

The MPs also have qualms about financial aspects of the deal. The committee is particularly sceptical about the £4 million fees paid by the Shareholder Executive to advisers from UBS, not least because the external experts provided a valuation of British Energy, even as Centrica bought a stake that proved to be 10 per cent less than EDF was willing to pay. "The committee is not convinced by the Shareholder Executive's explanation of why it needed to spend so much on external financial advice," the PAC says.

The government's assessment of the energy market's ability to deliver the necessary investment, with developments such as EDF's electricity price deal in France closely watched, was published alongside the budget. A spokesman for the DECC said: "We have made substantial progress on creating the right conditions for investment in new nuclear [capacity] in the UK and, to date, energy companies have announced plans to build up to 16GW [of it]."

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