What was once viewed as a slam-dunk deal and partnership between Electricite de France SA (EDF) and British Energy Group PLC has hit a snag, putting at risk the British government’s plan to revamp the ailing U.K. nuclear-energy program. But regardless of the deal’s outcome, the future of atomic energy remains bright in Europe, and even brighter in the world’s emerging markets.

After months of discussion, and with the British government’s approval, EDF was set to unveil a $23.5 billion, all-cash offer for British Energy on Aug. 1. But British Energy investors unexpectedly rejected the bid, sending the EDF back to the negotiating table and jeopardizing plans to refurbish the United Kingdom’s rapidly deteriorating nuclear-energy program.

The Department of Business and Enterprise had planned to trumpet the deal as a key stage in its plans for a second generation of U.K. nuclear power plants, hoping that EDF would bring an influx of French nuclear technology to the country along with four new nuclear reactors.

"EDF was the Government’s ‘get out of jail free’ card which hasn’t materialised – there are tough decisions to be made as the reality is Britain will run short of power," David Hunter, an energy analyst at consultancy McKinnon & Clarke, told The Independent.

British Energy, which is 35%-owned by the British government, supplies roughly 6% of that nation’s energy needs. But half of British Energy’s 16 nuclear reactors haven’t produced energy in the past two weeks and at least four of those shut down since last year due to age-related maintenance problems.

EDF, the world’s largest owner of nuclear power stations, seemed like the perfect candidate to help Great Britain achieve its nuclear goals – and to solve an emerging energy crisis. But after months of talks – and even after an increase to EDF’s intial bid in May – the deal was rejected, leaving only questions about Britain’s nuclear future.

Of course, those questions could be answered sooner than many critics think.

A Change of Plans

EDF has not ruled out making a what would be its third offer for British Energy, saying only that "conditions for a major development in Great Britain are not met to date." 

"British Energy would have been an ideal entry point for EDF, and EDF may have regrets about the deal not happening… this doesn’t at all slam the British nuclear door in their face," Colette Lewiner, an energy sector expert at French management consultancy Capgemini, told Reuters.

In fact, EDF is so determined to carve out a niche for itself, despite opposition, the company has already purchased land next to two nuclear plants in Britain. EDF owns land in Hinkley Point in southwest England, as well as a plot of land adjacent to the Wylfa nuclear power station, currently owned by the Nuclear Decommissioning Authority (NDA). If it could persuade the NDA to sell it further land, this could be the site of its first plant.

As for Britain, the government is disappointed, but will move on without EDF if necessary.

“We thought it was a good deal and we were ready to accept. It would have been a sensible way to take forward new nuclear plans in the U.K.,” Business Secretary John Hutton said. But he also added that “nuclear new build does not depend on one single deal. The level of interest in nuclear new build in the U.K. from EDF and from other operators remains high.”

EDF’s rivals, including RWE AG (OTC ADR: RWEOY) of Germany and Iberdrola SA of Spain, could offer some competition. Both companies decided against a bid for British Energy earlier this year, but they still have plans to operate their own nuclear power plants in the region.

Also, Centrica PLC (OTC ADR: CPYYY), the owner of British Gas, recently expressed its desire to move into the nuclear sector. The company was ready to take a 25% stake in British Energy once EDF completed its takeover, but has now been forced to review its options.

A resurrection of the deal would be welcomed; Centrica executives have been holding separate conversations with British Energy and they will no doubt explore joint venture opportunities of their own.

Nuclear Energy Powers the Planet

Regardless of what happens in Great Britain the global outlook for nuclear energy remains bright, for EDF and other companies making waves in the sector.

Uranium-fueled nuclear energy is rapidly re-gaining global acceptance as a clean, reliable alternative to such dirty-burning fossil fuels as coal and oil. In a twin bid to combat global climate change and to keep up with soaring demand for electricity, countries are rushing to build nuclear power plants.

There are currently 440 nuclear reactors in operation that combined generate about 16% of the world’s electricity. Another 25 are under construction, 38 are on order and 115 are proposed.

France meets almost 80% of its energy needs with a fleet of 58 nuclear reactors and more planned. Japan currently has 55 operating commercial nuclear power plants that supply about a third of the country’s energy. It hopes to have 11 more plants operational or under construction by 2010.

More than 40 developing countries have recently approached United Nations officials to express interest in starting nuclear power programs, and China alone is planning to build 30 new plants in the next 15 years – a venture that will consume an estimated $50 billion in capital. In total, the country may require as many as 200 plants by 2050.

(Executive Editor William Patalon III contributed to this report.)

News and Related Story Links:

• Money Morning:
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• Times Online:
  Nuclear fallout as EDF pulls £12bn British Energy deal

• Bloomberg News:
  British Energy Shareholders May Have Rejected EDF Bid

• Reuters:
  EDF has other cards to play without British Energy

• The Independent:
  UK nuclear plans left in tatters after collapse of EDF deal

The British government has approved the construction of new nuclear power stations, marking a shift occurring throughout the European mainstream that has traditionally been skeptical of atomic energy.

According to the Associated Press, Business Secretary John Hutton told Parliament that nuclear power "should have a role to play in this country’s future energy mix, alongside other low-carbon sources." His statement echoed assertions previously made by Prime Minister Gordon Brown and former Prime Minister Tony Blair.

The British government has lobbied strongly in favor of nuclear energy over the past decade but has encountered stiff resistance.

Greenpeace Puts Up A Fight

In February 2007, a judge ruled that the British government’s consultation process before making the decision to build the new nuclear power stations was "seriously flawed" and "procedurally unfair." 

Greenpeace accused the government of reneging on its promise to carry out "the fullest consultation" before making a decision to build the stations. It complained that the government failed to present clear information on key issues surrounding a new generation of nuclear power stations, such as disposal of radioactive waste and financial costs related to the project. After another inquiry into the project, the initiative was passed.

"In reality, nuclear power stations will not solve our energy problems and that’s because there’s a lie at the heart of the government’s energy policy," said John Sauven, executive director of Greenpeace. "We need energy efficiency, cleaner use of fossil fuels, renewables and state of the art decentralized power stations like those in Scandinavia. That’s the way to defeat climate change and ensure energy security."

Sauven also expressed concerns about the cost efficiency, the disposal of nuclear waste, and the possibility of an eco-tragedy on par with the Three Mile Island disaster of 1979 or Chernobyl in 1986.

Greenpeace isn’t the only one apprehensive about nuclear power plants. European countries have been particularly negative on the issue. Bans on new nuclear plant construction are currently in place in Italy and Belgium. Sweden and Germany have committed to phasing nuclear power completely out of their supply. A guardian/ICM poll showed last year that opponents of nuclear energy narrowly outnumbered supporters 49%-44% in Europe.  

What Europe Has to Gain From Nuclear Power

"Going nuclear" has its benefits. And many countries with emerging markets think the potential gains outweigh the possible risks. Great Britain is in a particularly vulnerable position, as about 40% of its power plants are gas-fired. That means it is heavily dependent on natural gas imports from Russia and the Middle East.

On Jan. 4, Npower, a British electricity and gas firm owned by Germany’s RWE, announced an increase in its household-energy tariffs. Electricity prices for its customers rose by an average of 12.7% and natural-gas prices by 17.2%. Rises for some customers were as high as 27%.

Npower and other energy firms say gas is expensive because oil is expensive. Dwindling reserves and insatiable demand from the rapidly growing economies have resulted in a supply crunch.

Also, Gazprom OAR, Russia’s state-run energy monopoly supplies 25% of Europe’s gas. It has also hiked prices and threatened to cut supplies on a fairly routine basis. In August, Gazprom threatened to cut off gas supplies to Belarus in an attempt to extort payment on a $456 million debt. Belarus eventually acquiesced with a $190 million payment. Two months later, Gazprom threatened to cut supplies to Ukraine over a $1.3 billion debt.

So it’s no wonder why many European nations are beginning to consider nuclear power a plausible solution. France already relies on nuclear power for 80% of its electricity needs. Bulgaria, Slovakia, and Romania are planning new reactors.

Greenpeace’s Sauven said that the new power generators approved by the government would only add 4% more energy capacity. But Britain’s current nuclear power stations produce approximately 20% of the country’s energy supply, and all but one of them will be closed down by 2023. And environmentally speaking, the British government has also been charged with the task of cutting carbon emissions by 60% of 1990 levels by 2050.

"Set against the challenges of climate change, and security of supply, the evidence in support of new nuclear power stations is compelling," Business Secretary Hutton said.

Hutton also assured the public Thursday that private energy companies – not the government – would pay for the plants, and that most would be built on the sites of existing stations.

"The British decision sends a very strong and positive signal to the industry," Colette Lewiner, who monitors energy for the Capgemini consultancy in Paris, told the International Herald Tribune. "Britain will be the first European country after Finland and France to build new reactors, at a time when Belgium and Spain are revisiting their positions on whether to keep a moratorium on new nuclear facilities."

Related Articles and Links:

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You can’t help but feel a sense of deja vu.

At least I can’t.

The last time the dollar fell this low and energy was this costly, traders were concerned about a massive recession, we were talking about a scary new economic syndrome called "stagflation," and the Major League Baseball’s Pittsburgh Pirates and Baltimore Orioles were actually perennial contenders.

It was the 1970s. The economy – then as now – was slowing as investors realized that Washington’s tough-talk and economic policies were nothing more than smoke and mirrors.

But the world has changed in the three decades that have followed. What’s different now is that we have a situation where our three largest creditors – Japan, South Korea and China – also are our largest trading partners.

And one of those trading partners – China – is extremely displeased by the weakening dollar.

In fact, all three partners are so upset that they’ve been making some very public noises about diversifying away from the greenback, or – and this is a huge deal – even dumping some of the $1.3 trillion worth of dollar-denominated debt instruments they hold.

China’s Greenback Angst

The gloom-and-doom crowd has labeled this scenario as China’s "nuclear option," because having China dump dollars on a wholesale basis would be akin to China lighting off a hydrogen bomb in the worldwide financial markets.

Come to think of it, I recall reading something in China’s press that employed the same slang term, so it’s not clear just who used it, first.

Anyway, from the way the media has reported this to date, you’d think the world was about to end.

Well, I don’t think so and when you get down to it, I really don’t think China’s "atomic saber-rattling" is much of an actual threat. In fact, I think it’s pretty benign.

For one thing, what China is supposedly saying is really nothing new, despite how the press is treating that country’s recent commentary on this issue. The truth is, China has been making noises about this for years, and so much of what’s being reported right now is really just ‘standard operating procedure,’ or S.O.P., for both U.S. and Chinese diplomats whenever they get together.

The manner in which the remarks were made is also a business-as-usual because the Chinese often use academic types to make what are essentially pending policy level announcements. That way, the official apparatchiks can remain unscathed should there be some unforeseen global backlash, which prompts a retreat or a potential loss of face.

Why There’s Bluster, Not Blasting, to Come

How this ultimately all plays out remains to be seen, and is really impossible to predict (though I doubt it will be as bad as some fear). But even if nothing comes of this, there are some things that need to be understood:

First, there is literally not another currency on the planet capable of absorbing a few hundred billion dollars. Therefore, even if China actually decides to dump the dollar, there literally isn’t any other currency that could stand in and absorb the excess capacity if China were to go shopping for alternatives to the greenback.

The European euro is at record levels and EU governments are struggling with how uncomfortably high it’s become. The Japanese yen, which would have been a good candidate in the past, has effectively been neutered by what’s left of the carry trade. Other countries are either unstable, or too small, for to be relied upon. The Middle East, Russia and Africa are hardly the poster children for stability, so they’re out too. As for the rest of the Asian Rim, those countries are too small to have meaningful places in the fiat currency arrangements relied upon by world bankers as a source of checks and balances which is why they’re not included in any of the major currency trading "pairs" in the FX markets at the present time. The bottom line: If China were to start dumping dollars, it would simultaneously put at risk every other currency it its basket in the process. It knows this. Therefore, by making such seemingly vitriolic pronouncements, what China is actually doing is to cement in place its own version of Mutually Assured Destruction – which helped keep the United States and Soviet Union out of a nuclear throw-down during the Cold War.

In doing so, China is attempting to create enough fear to make sure the world will never want to square off against it. And the Democrats who look increasingly likely to inhabit the White House next year will be fearful of enacting the punitive tariffs they’re talking so toughly about right now.

At the end of the day, China knows just how dependent they are on exports, so dumping dollars is hardly conducive to continuing those relationships, particularly since the last time I checked more than 50% of Chinese exports were headed straight for the U.S. market.

To be clear here, though, there is an element of truth to what the gloom-and-doom crowd alleges. China will continue to posture and undoubtedly will engage in short-term allocation changes designed to make clear its point. But, beyond that, nobody in Beijing is going to push the financial nuclear "button" as long as we’re all mutually engaged.

Over the long term, however, if we can no longer claim mutual engagement, then, frankly speaking, we’ll have bigger fish to fry. And currency dumping won’t even be on the radar screen.

Second, for all of China’s noise about how low the United States is letting the dollar sink, China has to share some of the blame. For that reason, I’d even go so far as to suggest that China’s threats are really a call for help.

For all its growth and prowess as an emerging world power, China’s financial markets remain remarkably primitive by world standards. What’s more, their capital markets remain woefully underdeveloped for the economic structure that’s being developed. As a result, the Chinese are actually uniquely dependent on a falling dollar to succeed over the long term.

And that brings me to my third point, which is that China is really an overvalued economy masquerading as a highly developed one. Like others before it, China will realign its interests and, at a time when the market chooses, the value associated with it will revert to longstanding norms.

What’s more, despite the fact that neither party will admit it, both the United States and China will emerge as stronger beings for having danced this financial Lambada together.

Deja vu All Over Again

Are you skeptical of my scenario?

If you are, I can’t blame you.

But, as Yankee great Yogi Berra used to say, "it’s Deja vu all over again." In other words, we’ve seen and heard this whole "currency dumping" hypothesis at least once before. If you think about it for a minute, you’ll know just what I mean.

What’s going on now is really just a replay of the 1980s, when Japan was viewed as an unstoppable juggernaut, and the Yen as the currency that would soon dominate the worldwide economy. People have apparently forgotten that Japanese businessmen were regarded as modern day samurai. Words like ruthless, cunning, and predatory were bandied about.

They’ve also forgotten that many the charges presently being levied against the Chinese now were levied against the Japanese then.

I think you know where this is going, but let me close the loop anyway.

Long story short, the Japanese waded into financial markets around the world, snatching up prime assets in nearly every country at fire-sale prices. There was a huge, emotionally driven backlash at the time when such assets as the Pebble Beach golf course and Rockefeller Center office building went up on the auction block and were snapped up by Japanese suitors. Later in the game – toward the end of Japanese hegemony – they were actually paying irresponsibly high premium prices for the assets, but that’s another story.

What’s vitally important to remember is that the Japanese Yen, as powerful as it was at the time, actually played an important role in setting the foundation for one of the longest, most profitable bull runs in history as the excess value they brought to the market was absorbed by other economies, including our own.

Will the same thing happen this time?

I don’t know for sure. But having participated in the great Japanese buying binge firsthand, I’m betting that if you follow the money, as Money Morning advocates, you’ll profit this time around, too.

You’ll also get a potential two-for-one deal at the same time that’s likely to result in higher returns, too. The reason is that by purchasing Chinese firms on the prowl as well as their intended targets in the natural-resources, financial-services and hi-tech sectors, you not only set up your investments for some healthy appreciation, but you also hedge your investment dollars from further decline by owning shares denominated in other currencies.