united kingdom: October 23, 2008

Following our May 2008 article “Nuclear Reborn”, there have been a number of curious twists connected with the EDF bid to acquire the UK’s sole nuclear generator, British Energy (BE).

The EDF bid had received encouragement from the UK Government which retains a 35 percent stake in BE. The EDF board, believing the UK Government’s good intentions on behalf of all BE shareholders, had tabled a bid of £12bn for the company. The bid was rejected as being too low by two hedge funds, which together held 22 percent of BE and caused significant embarrassment to EDF which had already announced the purchase with great fanfare.

Over the past few months there has been considerable behind the scenes activity to seek a solution to the impasse. From a political view, there is criticism of a proposed sale to EDF which is majority-owned by the French Government. From a shareholder view, it is strictly a question of the right value, and from a regulatory standpoint, the question is whether EDF will be too dominant in the UK energy market.

In September, EDF tabled a new bid of £12.4bn which gained shareholder acceptance. Furthermore, Centrica, the owner of British Gas which has a significant customer base without much generation cover, is in discussions with EDF in acquiring 25 percent of the generation of BE’s reactors. In addition, EDF has undertaken the sale of three existing nuclear sites which should encourage other companies with nuclear experience into the UK market.

Is all of this a good outcome? We believe so for a number of reasons. Firstly, it provides a clear direction for the future development of the UK nuclear power industry and ensures that nuclear energy will play a significant role in the UK energy market. Secondly, EDF has 58 reactors in France and has considerable experience in construction, maintenance and operation of nuclear power sites. Thirdly, the introduction of Centrica will provide a broader base and politically important UK participation in the nuclear program. Finally, the sale of reactors will encourage more competition in the market including the potential introduction of suppliers such as Eon and RWE.

Perhaps the most important outcome is that EDF injects some much needed certainty into the future of the UK generation industry since the electricity market currently faces some capacity issues as a direct result of the EU Large Combustion Plant Directive restricting the operation of large coal-fired plants which do not meet emissions targets and require closure by 2015.