EDF’s planned takeover of British Energy risks creating serious competition problems in the UK electricity market, rival companies and customers have warned.  A deal that values British Energy’s equity at about £12.5bn ($24.8bn) could be announced this week. It is backed by the UK government, which controls 35 per cent of the company and wants to get the industry moving on building more nuclear power stations.  But electricity companies and industrial users have called for radical changes to protect competitors and consumers. The business and enterprise select committee makes the same call on Monday in its report on energy markets. An EDF deal would mean “essentially handing the British nuclear industry to the French government”, says Dieter Helm, an energy expert at Oxford University. EDF would have a dominant position in running Britain’s existing nuclear power stations and in building more. Another French company, Areva, leads a consortium that this month won the contract to run the fuel reprocessing and fabrication operations at Sellafield, north-west England. Areva also supplies pressurised reactors that EDF plans to build in the UK. Both companies are controlled by the French state.

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. “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. British Energy plus EDF will have about 21 per cent of Britain’s power generation capacity but a higher share of output, because nuclear power stations are in use more often. A greater concern is the effect on competition in the wholesale market, where generators sell to suppliers. Keith Munday, commercial director of Bizzenergy, an independent supplier, calls the move “a very significant step in the wrong direction”. The wholesale electricity market “is profoundly illiquid”, he says. “It’s bad now and it’s going to get worse.” Concerns about liquidity in the wholesale power market have been rising 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, which both generate and sell their own electricity. Independent suppliers and some customers say it is too hard for entrants to break into 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 role. “A takeover of British Energy by EDF would move a huge chunk of generation capacity into an integrated group,” says Graham Paul of Electricity4Business, another independent supplier serving small and medium businesses. “It will do damage to the liquidity of the already struggling wholesale market.” 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.  “There is very,very little liquidity or trading ability three or four years out, which means that in the time frame that it takes to build one of these stations there really is almost no price signal to show you what would be the returns once you started operating,” she said. “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, which is in talks to take a stake of about 25 per cent in British Energy, may help the public image of EDF’s bid, by involving a UK company, but risks making the impact on competition even worse, by tying another integrated group into the alliance. The European Commission will look at the acquisition, but EDF believes Brussels will not put any obstacles in its path. Prof Helm says the Commission is likely to “take an essentially benign view” of the deal.  Other industry experts think EDF will be asked to sell some power stations to strengthen competition. British Energy’s seven ageing gas-cooled reactors will be hard to sell, partly because of safety regulations, partly because no other European companies see them as attractive assets. But EDF has gas and coal-fired power stations, and is building another gas-fired plant, and could sell one or more of those. Ofgem, the UK energy regulator, is conducting its own review of gas and electricity markets, which is set to conclude in the autumn, and there is a strong expectation in the industry that it will call for a full Competition Commission investigation. If that inquiry is called, the effect of an EDF/British Energy deal is likely to be one of the central issues for it to address. If the deal goes ahead*, the prospect that the inquiry would recommend structural reforms of the market will be that much greater.