Powergen closures send shock waves through energy market

Powergen, the UK's third-biggest electricity producer, yesterday announced the closure of a quarter of its generating capacity, blaming the collapse in wholesale prices and the Government's lack of a long-term energy policy.

The company, now part of the giant German utility group E.ON, is mothballing its Killingholme gas-fired plant in Lincolnshire and the Isle of Grain oil-fired station in Kent, resulting in a reduction in capacity of 1,800 megawatts.

Paul Golby, Powergen's chief executive, said that since the introduction of the new electricity trading arrangements or Neta 18 months ago, wholesale prices have fallen by 40 per cent. "This situation is simply not sustainable. The market is bust," he added.

Powergen's action follows the collapse of the UK's biggest electricity producer, the nuclear generator British Energy, which is only being saved from insolvency by an emergency £650m cash injection from the Government.

Powergen mothballed one of the two 450 megawatt units at Killingholme earlier this year and yesterday it said it was withdrawing the second one along with the two 675 megawatt units at Grain.

The two power station closures will reduce Powergen's capacity by 26 per cent and cut its share of the market to about 7 per cent. However, only 85 jobs will be affected.

Mr Golby said Powergen would "continue to review our options in light of these difficult market conditions" – a clear hint that it could reduce capacity still further.

He also called on the Government to bring forward the publication of its energy review, which is not due to appear until early next year. "What the market needs is a long-term energy policy which delivers all of the Government's objectives, not just lower prices," Mr Golby said. "This is a problem which is facing everybody, not just British Energy. If companies like mine are to invest in future generation such as renewable energy then we need to have healthy sustainable businesses. The market, at the moment, just does not allow that to happen."

The current price of wholesale electricity is 13p to 15p a unit compared with the 18p it costs to produce electricity from gas and nuclear stations and the 22p price that would be required to justify building new gas-fired capacity.

Although the UK has about 22 per cent more generating capacity than it needs, even on the coldest winter day, ministers have been warned that there will be a shortage of capacity in the longer term unless they act now to give generators the incentive to build new plants.

Mr Golby said that as a first measure the Government should accelerate the closure of the ageing fleet of Magnox nuclear reactors operated by the state-owned British Nuclear Fuels and provide incentives for generators to build replacement capacity.

E.ON paid £5.1bn for Powergen 18 months ago and took on a further £4.5bn in debt, taking the cost of the deal to £9.6bn. The takeover also brought with it the US electricity company LG&E and 3.5 million retail customers in the UK.

Powergen has offset its generating losses partly by selling wholesale electricity to its retail arm at cheap prices, increasing the profitability of its supply business. But Mr Golby said Powergen was still exposed because it generated twice as much electricity in the UK as it supplied through its retail arm.