Price regime puts power firms at risk of defaulting

Banks could be forced to take over some of Britain's power stations because cheap electricity prices could force their owners to default on their loans, industry experts warned yesterday.

A 40% fall in wholesale power prices since 1998 has led producers to put plants on the market, mothball others and suspend indefinitely plans to install new gas-fired stations.

The troubled American group, AES, is selling the huge 4000MW coal-fired plant at Drax, South Yorkshire, it bought from National Power two years ago. Earlier this year it put its Fifoots station in south Wales into receivership.

Other producers, including BP, which is selling its new Great Yarmouth station, and TXU-Europe, which has mothballed plants, have been hit by the continuing decline in wholesale prices.

These have fallen 20% in the past year since the new electricity trading arrangements (Neta) were introduced by the energy regulator Ofgem in March 2001 and, according to David Porter, chief executive of the Association of Electricity Producers, they could stay at that level (£15 per mega-watt hour compared with the £24 required to be profitable) for at least five years.

"Having seen one station go into receivership, it has to be a real risk that others will follow," Mr Porter said. Industry executives, including those who sold stations at a substantial profit in the late 1990s and can see them now worth less than their asset value, privately agree.

Mr Porter said: "It's a possibility that, if the people who have been loaned money by a group of banks for a power project can't service the loan, the banks would have first call on the assets. It would be a bit like repossessing your house."

The worry among power producers is that the banks would quickly auction off any power stations they take on, accepting a relatively low price and enabling the new owners to re-enter the market while offering even cheaper power. This would compound the problem.

The low prices are partly conditioned by the so-called plant margin - the amount by which installed capacity exceeds peak demand.

In England and Wales, peak demand at the turn of the year, when the weather is at its coldest, is approximately 52,000MW, but capacity is now about 70,000MW - a margin of 25%.

Both Ofgem and electricity distributors argue that such a wide margin guarantees security of supply but Mr Porter is concerned that some stations, especially those that have been mothballed, may not be capable of being switched on in time to meet excessive demand.

Ofgem says only 4% of the available capacity is mothballed, with some plants returned to the system since being shut down earlier this year. "Neta has created a forward price curve, which extends for two to three years and helps signal the need for people to put plants back on the system," officials said.

Earlier this year, Callum McCarthy, the chief executive of Ofgem, said the fall in prices was the expected result of genuine competition, which had broken the stranglehold of monopoly producers.

"A number of banks which financed projects are now having to refinance them," he said. "Tant pis."