Nuclear power is back on the agenda in Britain. If more nuclear stations are ordered, which is far from certain, it will mark a fresh start for an industry in which Britain once hoped to lead the world, but which was crippled by a series of misjudgments on the part of politicians, managers and investors.
The first mistake, made in 1965, was to choose the uniquely British advanced gas-cooled reactor (AGR) to replace the first-generation Magnox stations, when other countries opted for the US-designed light water reactor (LWR). Getting the AGR stations to work proved to be a Herculean task, putting Britain's nuclear programme far behind that of France, which wisely dropped its national design in favour of a Westinghouse LWR.
This was followed by a prolonged debate about what reactor type should follow the AGR, culminating in the early 1980s in an order for Britain's first and so far only LWR, at Sizewell in Suffolk. Then came privatisation. The Thatcher government, having decided to transfer electricity to the private sector, faced the problem of how to deal with the huge liabilities for decommissioning and fuel reprocessing costs at the nuclear stations. The solution was to create a generating duopoly, one member of which, National Power, would be big enough to handle these costs.
However, it soon became clear that the liabilities were so unpredictable that the nuclear stations would have to be withdrawn from privatisation. Two state-owned companies were set up, Nuclear Electric in England and Wales and Scottish Nuclear in Scotland, to manage the existing stations. Amid uncertainty over costs, Mrs Thatcher's original hope of building a series of LWR stations was also abandoned.
At this point the reputation of nuclear power, and the credibility of its advocates, had sunk to an all-time low. Yet over the next few years, as Simon Taylor explains in this well-researched and revealing book, nuclear power staged something of a renaissance. The new state-owned companies achieved dramatic improvements in the performance of the AGR stations, and by the mid-1990s they were strong enough to be privatised. They were merged to form British Energy and floated on the stock market in July 1996.
The UK now had a commercially viable nuclear power company which could cope with the decommissioning costs without government support. Although there was no immediate prospect of new nuclear orders British Energy retained the expertise that had been built up since the 1950s and kept open the possibility of reviving the nuclear option should the economics of rival fuels change. Moreover, after a shaky start, it increased its profits and cash flow to the point where, by the end of the 1990s, it became a stock market favourite.
Why, then, did the company run out of cash in 2002? Taylor puts part of the blame on investors, who misunderstood the business. The nuclear stations were base load suppliers to the national grid and their income was dependent on the wholesale price of electricity, which was set by competition. In that sense British Energy was not a regulated utility, with predictable revenues, but a capital-intensive commodity supplier with no pricing power, comparable to a steel producer. But because investors thought it was a utility, they pressed the board to return any surplus cash to shareholders. With the share price riding high, the board responded in 1999 with a special payment of £432m.
The effect was to weaken the company's finances at a time when electricity prices were about to fall sharply. The mistake was compounded by British Energy's inability to reduce its dependence on nuclear power through diversification. It nearly merged with Southern Electric, one of the best-managed regional supply companies, but withdrew at the last moment. This episode is described by Taylor as one of the industry's great might-have-beens. The merger would have created the UK's largest electricity company capable of taking part in the later consolidation of the European power industry alongside such companies as RWE and Eon in Germany and EDF in France.
British Energy was rescued by the government and subsequently refloated but its role in any nuclear programme is likely to be as a junior partner to one of the big Continental utilities, which already own a sizeable chunk of the British electricity industry. Does this matter? Probably not, but it does seem odd that, in a country which built the world's first nuclear station, the future of nuclear power should be largely in the hands of non-British companies using non-British technology.
The writer is senior fellow, department of management, London School of Economics