Time is up for British Energy loan

The Government has warned British Energy that it is not prepared to extend its £650m emergency loan beyond this month, significantly increasing the prospect of administration for the troubled nuclear generator.

British Energy executives and Department of Trade and Industry (DTI) officials are furiously thrashing out a plan to save the company from collapse, before the loan facility runs out on 29 November.

It is understood that while progress is being made, a deal is unlikely to be struck before the deadline.

Sources close to the talks said the Government had made it clear that it is not willing to roll over the loan for a second time.

In September, the Trade and Industry Secretary Patricia Hewitt gave British Energy another five weeks' breathing space when she extended the original loan given to the company and threw an extra £240m into the pot.

But insiders have said that ministers don't want to write another open-ended cheque for British Energy. Therefore, if a deal is not agreed by 29 November, British Energy will be forced into administration.

It is also understood that Gordon Brown has expressed reservations about the bailout. Whitehall sources said that the Chancellor has told Cabinet colleagues that a deal may not represent good value for tax- payers' money. Mr Brown is expected to provide further comment on British Energy when he issues his pre-Budget statement before the end of the month.

In a further sign that the Government views administration as a real prospect, the DTI set up two teams to deal with British Energy. One group of officials are working on the rescue package, assuming that a deal can be completed before 29 November. The other team is working on what to do if the deadline is not met and the company goes into administration.

A DTI spokeswoman claimed that "all options are open" and no final decision on whether to roll over the loan had been made. But a source close to the negotiations said: "If they can't make it by the end of the month, administration is a dead cert."

It is thought that the DTI now views a merger between British Energy and British Nuclear Fuels Limited (BNFL) as one possible solution. However, executives at BNFL, which reprocesses waste for British Energy, are not thought to be keen on the idea.

In the longer term, the Government is considering plans to alter the electricity trading system, New Electricity Trading Arrangements, to pay energy companies even if they are not producing electricity. The low price of wholesale electricity was one of the reasons British Energy ran into difficulties.

Under the new plans, likely to be introduced when Neta is extended to Scotland, generators will be paid when they have plants available on "standby" to supply electricity, in an arrangement called "capacity payments".

The idea was mentioned in the responses written by the power companies to the Government's Energy White Paper. A Bill is expected in January.

Whatever the solution, it is unlikely that British Energy executive chairman Robin Jeffrey will be running the company. It is understood that head-hunters Heidrick & Struggles have been appointed to find his replacement.