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EDF's planned takeover of British Energy risks creating serious problems in Britain's electricity market, the companies' competitors and customers have warned.

A deal valuing British Energy's equity at about £12.5bn is close to being agreed and could be announced this week. It is backed by the government, which controls 35 per cent of the company and wants to get the industry moving on building new nuclear power stations.

However, other electricity companies, and industrial users, have sounded the alarm over competition in the electricity market, and called for radical changes in the industry to protect competitors and consumers.

The business and enterprise select committee of MPs makes the same call in its report on energy markets published today, urging the government to put safeguards in place to protect competition.

The EDF deal would mean "essentially handing the British nuclear industry to the French government", according to Dieter Helm, an energy expert at New College Oxford.

EDF would have a dominant position in running Britain's old nuclear power stations and building new ones. It would follow the success of another French company, Areva, head of a consortium that this month won the contract to run the fuel reprocessing and fabrication operations at Sellafield.

Areva also supplies the European pressurised reactors that EDF plans to build in Britain. Both companies are controlled by the French state. "If the ambition was to create a privatised market where we have companies competing against each other, we have taken one step in a completely different direction," Prof Helm says.
For rivals and customers of EDF and British Energy, that is worrying. It is not so much the pure size of the combined company's market share that is the problem - British Energy plus EDF will have about 21 per cent of Britain's power generation capacity - rather, the focus of concern is the effect on competition in the wholesale market, where generators sell to suppliers.

"We think this move is a very significant step in the wrong direction," says Keith Munday, commercial director of Bizzenergy, an independent supplier. "The wholesale electricity market is profoundly illiquid. It's bad now, and it's going to get worse."

Concerns about liquidity in wholesale power have risen in recent years. A growing proportion of generation capacity has been tied up in vertically integrated companies such as EDF, Centrica, and Scottish and Southern Energy that both generate and sell their own electricity. Independent suppliers such as Bizzenergy have complained that it is too hard for new entrants to break into either generation or supply.

As Britain's biggest generator, with no supply business, British Energy has played a vital role in the wholesale market. If bought by EDF, it risks losing that.
Dorothy Thompson, chief executive of Drax, the coal-fired power generator, warned recently that the lack of liquidity in the wholesale market was preventing independent companies investing in new power stations.

"At the moment there are only three players of significant size who trade through the wholesale market for most of their output. And that is International Power, British Energy and ourselves," she told Platts Power UK magazine. "The concern that I would have is if more capacity was to come out - particularly with the sale of British Energy - the market could actually become quite compressed in terms of liquidity. And it is liquidity that makes a market effective."

The involvement of Centrica, in talks to take a stake of about 25 per cent in British Energy, may help the public image of EDF's bid but risks making the impact on competition even worse, by tying another integrated group into the alliance.
EDF believes that, although the European Commission will have to look at its acquisition of British Energy, Brussels will not put any significant obstacles in its path.

Other industry experts think EDF will be asked to sell some power stations to strengthen competition.

However that would not go far enough for some. Companies such as Drax and Bizzenergy have argued there may be a need to change the way wholesale electricity is sold in Britain, to make the market more open and competitive.

Bid to win favour with UK investors

EDF and British Energy are discussing a plan to let the UK company's shareholders benefit from any future improvement in its business, as a way of bridging the remaining gap between the two sides.

Although they are close to a deal, and still hope agreement can be reached this week, there has been a difference on price, with EDF unwilling to accept the 750p-a-share or more value put on British Energy by its board and shareholders.
A possible solution is a deferred payment paid to shareholders later if British Energy performs well.

It could help the government, which owns 35 per cent of British Energy, avoid accusations of having sold its stake too cheaply, as in the case of Qinetiq, the defence technology company.

Source: The Financial Times