Why we aren't surprised by British Energy's troubles

British Energy has seen its share price fall 40% over past couple of months on a string of problems. The only surprise was that anyone was shocked by these latest developments. So what do they mean for investors - and consumers?

This feature is part of our FREE daily Money Morning email. If you'd like to sign up, please click here: sign up for Money Morning .

Regular readers of MoneyWeek may have noticed that we've never been overly keen on British Energy. As the group's shares soared over the past year or so, we've watched its progress with much the same bemusement that Samuel Johnson felt about the sight of a dog walking on its hind legs: "It is not done well; but you are surprised to find it done at all".

Now, like a particularly unsteady dog, the firm has fallen flat on its face. Over the last couple of months, shares have plunged 40% on a string of problems. This week, the bad news has been capped by the announcement that only one of its eight plants is running at full output, and two have been shut down altogether due to cracks in the boilers.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

But the only real surprise here is that anyone was shocked by the latest developments. The firm has a long history of problems and there was always an excellent chance that more would emerge...

Back in 2002-2004, British Energy was on the verge of collapse as power prices plunged. But since then, it appeared to have turned the corner, thanks to a government backed bailout including the state assuming £5bn-plus worth of reactor-decommissioning liabilities and the very sharp rise in energy prices during 2005 and 2006.

Shares trebled between January 2005 and August this year. The high point came shortly after the government announced that it would sell most of the 65% interest it owns following the bailout. (As a result of the group's latest woes, those plans are now on hold.)

But the warning signs were still there for anyone who cared to look. The company's plants are out-of-date, 30-year-old units and they were almost guaranteed to throw up problems such as these. The fact that BE hoped to extend the working life of this obsolescent kit for a further 10 years should have been an outright red light.

The next few months are likely to be painful for BE and its investors. It's not clear when the two reactors will be brought back on line, but until they do, the firm will have to buy electricity in the wholesale markets to meet its delivery obligations.

The combination of reduced supply and a forced buyer is likely to bid up electricity prices. That's bad news for British Energy, bad news for consumers, but good news for other generators. (Hence a number of investors piled into Drax Power once the BE news broke).

And you have to doubt whether this will be the end of problems, both for BE and for the UK nuclear sector as a whole. Not being nuclear engineers, we have no especially informed ideas as to what else could go wrong, but it is discomfiting how often major problems turn up. By an unhappy coincidence, BE's latest problems were revealed in the same week that the Sellafield reprocessing plant was fined £0.5m for the large leak of radioactive liquid that made headlines in April 2005.

Of course, the impact from this is likely to go far beyond British Energy's bottom line. It raises more questions about the always-dubious proposals to extend the life of the UK's current nuclear stations. But it will also damage the government's plans to build new plants as replacements.

New nukes will be a hard sell at the best of times and this news certainly won't help win hearts and minds. While there appears to have been no safety risks as a result of these latest incidents, just seeing the words nuclear' and crack' in the same sentence understandably sends people running for the fallout shelter.

And it certainly won't help the chances that new reactors could be built without public subsidy. Yes, newly-built units shouldn't be subject to the same problems, but the whole troubled history of British Energy serves as a cautionary tale for potential investors in nuclear plants.

Turning to the markets...

Enjoying this article? Why not sign up to receive Money Morning FREE every weekday? Just click here: FREE daily Money Morning email.

The FTSE 100 ended the day 41 points higher, at 6,150, with Man Group one of the day's biggest risers on reports that it is forging ahead with demerger plans. International Power fell the furthest yesterday, as investors took profits following gains earlier in the week. For a full market report, see: London market close

Across the Channel, leading stocks also ended the day higher. The Paris CAC-40 up 58 points to close at 5,361, whilst the German DAX-30 was 67 points higher, at 6,182.

On Wall Street, stocks were mixed. The Dow Jones broke through the 12,000 barrier for the first time ever in early trading, though fell back to 11,992 by session close, a 42-point overall gain. The Nasdaq fell 7 points to close at 2,337. And the S&P 500 closed just 1 point higher, at 1,365.

In Asia, the Nikkei fell 101 points to close at 16,551 today.

Crude oil last traded at $58.02 a barrel, whilst Brent spot was at $57.33.

Spot gold was trading at $588.60 this morning, up from $587.60 in New York last night.

And in London this morning, Britain's second-largest insurer, Prudential Plc, hit targets with a nine-month sales increase of 11%. However, the company announced that its UK internet banking division Egg will report a second-half operating loss as a result of a rise in bad debts and a fall in lending.

And our two recommended articles for today...

Why markets need to take Peak Oil seriously

- The current dip in the price of oil is sending false signals to the financial world, says James Howard Kunstler for The Daily Reckoning. But it's time markets started to take Peak Oil seriously. To find out why stock market strength is based on unrealistic expectations of future growth, read: Why markets need to take Peak Oil seriously

Why Ben Bernanke's balancing act will fail

- The US Federal Reserve chief is caught between recession on one side and rampant inflation on the other. Bill Bonner looks at why Ben Bernanke is heading for a fall, whatever he does, in this MoneyWeek article which has just become available to non-subscribers: Why Ben Bernanke's balancing act will fail

Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.