As in the United States, most of the UK electric utility industry's stranded costs¹ stem from past investments in nuclear energy. This is largely due to large cost overruns in the construction of nuclear facilities and to unforeseen spent-fuel reprocessing and disposal liabilities, as well as decommissioning costs.¹ Unlike the United States, however, British nuclear power up to the time of privatization had always been publicly owned. Hence, the issue in the United Kingdom of who should bear the burden of stranded costs was between rate payers or tax payers. In contrast, in the United States, the issue of allocating the burden of nuclear energy stranded costs is between rate payers and share holders. Stranded costs are frequently defined as the value of unamortized investments in electricity assets that could not be recovered in a competitive marketplace, or the difference between the market value and the book value of these assets.

In part, the UK public underwrote a share of the nuclear industry's stranded costs the moment it became apparent that the market value of nuclear assets was far less than their book value. The original UK privatization plan intended to couple nuclear power plants with the thermal power assets of National Power (which was later to become a privately-owned generation company in the United Kingdom), and then to auction off the company to the public. However, as nuclear power's high cost structure, spent-fuel reprocessing and disposal liabilities, and decommissioning costs became more apparent, the financial viability of nuclear plants became questionable. Plants build three additional nuclear power plants also raised concerns over the future liabilities of the nuclear power industry. In November of 1989, the UK government announced that the auction of nuclear power assets would be put on hold, and all new construction of nuclear power plants was canceled. In order to sustain the industry until it could be eventually privatized, the government specified quantities of nuclear electricity that each of the regional electricity distribution companies were required to purchase. In 1990, a non-fossil fuel levy of 10 percent of total electricity revenue was put in place. This levy, used to reimburse the regional electricity distribution companies for their purchases of nuclear electricity at above market rates, was to last until 1998. Ninety-one percent of the levy was allotted to nuclear and 9 percent to renewables (such as wind power and biomass). The levy in essence placed a portion of the nuclear industry's stranded costs onto electricity consumers. The permanency of this subsidy, however, was in doubt a factor that continued to jeopardize the nuclear power industry's viability with investors.

Subsequently, the British government decided that only the country's most advanced nuclear power reactors could be privatized successfully. These included five advanced gas-cooled reactors in England, two advanced gas-cooled reactors in Scotland, and one pressurized water reactor in England. Older reactors, using what is known as Magnox technology, were to be retained by the UK government as a public corporation and operated by British Nuclear Fuel, a state-owned nuclear fuel cycle and waste disposal company. When nuclear power was finally auctioned in July 1996 (creating the company British Energy), the $2.2 billion raised during the auction equaled only the approximate cost of just one of the company's most recently completed nuclear power plants. The remaining costs- the stranded costs stayed with the government. When British Energy was privatized, its share of the non-fossil fuel levy payment was also terminated. As a result, the overall levy assessment on electricity consumers was dropped from 10 percent to 3.7 percent.

In 1995, British Energy accounted for 18 percent of the UK's electricity supply (British Nuclear Fuel accounted for the remaining 8 percent of electricity supplied by nuclear power).³ Unlike other electricity privatization underwriting, there was no windfall to investors in the sell off of British Energy. In the first day of trading, British Energy share prices fell 10 percent.⁴

File last modified: October 19, 1997

URL: www.eia.doe.gov/emeu/pgem/electric/ch2_box1.html