1 Estimating British Energy's nuclear
liabilities
1. British Energy has eight nuclear power stations
located around Britain which generate about 20% of the electricity
used in England and Wales and 50% of that used in Scotland. Figure
1 shows the location and type of each of these power plants
and the date that each one is due to be shut down.
Figure 1: Location of British Energy's power plants
Source: Electricity Association
2. British Energy got into financial difficulties
in September 2002 and turned to the Government for support. When
it was privatised in 1996, the Company assumed responsibility
for meeting the cost of its nuclear liabilities. But in practice,
international obligations undertaken by the United Kingdom Government
mean that the State must meet the costs of these obligations if
no other party is able to fulfil them.[4]
3. The Government has taken on three forms of nuclear
liabilities (Figure 2). The spent fuel liabilities where
the Company already had a contract with British Nuclear Fuels
Ltd amount to some £2.6 billion and will largely arise over
the next 10 years. Underwriting the costs of two other components
relates to uncontracted liabilities for spent fuel and nuclear
waste (£0.35 billion); and the liabilities for decommissioning
of British Energy's eight nuclear power plants (£2.4 billion)
which are expected to be incurred over the next 100 years.
Figure 2: Summary of British Energy's nuclear
liabilities
Source: National Audit Office
4. In November 2002, the Department decided it would
support a financial restructuring of British Energy but during
the restructuring, which was not completed until January 2005,
the Department did not have an up-to-date estimate of the likely
liabilities it was taking on. The only estimates available had
been prepared prior to the Company's privatisation in 1996. As
part of the restructuring, the Department agreed with the Company
that the liabilities would be re-valued at least every five years.
5. In February 2006, the liabilities underwritten
by the taxpayer were estimated at £5.3 billion on a discounted
basis, an increase of £1.2 billion (unaudited) on the previous
forecast. The new estimate included revised figures published
by the Company for its uncontracted and decommissioning liabilities.
The Department cannot rule out further increases in the nuclear
liabilities but considers that, based on experience in other countries,
costs tend to increase as estimating methods are refined but could
decrease thereafter as costs are optimised. Nevertheless, there
remains considerable uncertainty over the scale of the future
liabilities, reflecting the many technical uncertainties still
associated, for example, with decommissioning, particularly affecting
those liabilities that will mature in the longer term.[5]
6. This uncertainty is increased by different discount
rates used by Government departments when quoting liability estimates
in different situations. Discount rates are used to estimate at
current prices the cash flows which may occur in the future. The
Treasury's Resource Accounting Manual, for example, set a flat
discount rate of 3.5% for provisions in the Resource Accounts
for the year ended 31 March 2005. This rate was used to prepare
the £5.3 billion estimate of the nuclear liabilities.[6]
The Treasury's Green Book on Investment Appraisal on the other
hand states that for projects with long term impacts a declining
schedule of discount rates should be used, starting at 3.5% and
declining to 2.5% after 76 years. In addition, figures quoted
by British Energy and other companies in the sector may differ
again reflecting their individual circumstances. British Energy
used a discount rate of 3% on its recent revaluation of the liabilities.
Although the selection of specific rates is intended to provide
a more accurate assessment of the present value of future costs,
these varying approaches create confusion and difficulty for the
user in trying to reconcile the different estimates.
4 1957 Euratom Treaty,1996 Convention on Nuclear Safety
and other agreements Back
5
Qq 4, 5, 19, 22 Back
6
An updated flat discount rate of 2.2% was set by the Treasury
for Resource Accounts for the year ended 31 March 2006 Back
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