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In the port of Saint Nazaire on the Atlantic coast, France’s first floating wind turbine is being readied for a trip out into deep water, where it will form part of France’s push into renewable energy.
“In France we have some of the best wind resources in Europe. It’s the equivalent of two nuclear power plants on the Mediterranean coast and Brittany is the same,” claims Paul de la Guérivière, chief executive of Ideol, which is launching the giant turbine next year.
But France’s love affair with nuclear will be hard to break. Back in Paris, another idea is being floated, and this could prove just as important for the transition from nuclear energy, which provides more than 70 per cent of the country’s power compared with close to 18 per cent from renewable sources.
When Emmanuel Macron was France’s economy minister in 2016, he suggested Électricité de France, the giant nuclear-focused state-backed energy company, could be split up. Now, with Mr Macron as France’s reform-minded president, the idea has resurfaced.
In a November interview with the Financial Times, France’s left-leaning and popular energy minister Nicolas Hulot said EDF needed to embrace a transition towards environmentally friendly energy rather than “resist” it. He added that this might require revisiting the structure of the company.
Analysts suggested EDF’s nuclear activities and riskier debt could be separated from its renewable, retail and network assets. The split, said analysts at UBS, would follow the model of RWE and Innogy in Germany. The nuclear rump could be delisted, they suggested, to sell power at a new, regulated price while keeping a stake in the renewables-focused business.
Such radical moves could even find some support at the company, which has struggled since its monopoly in France ended and much of the energy market was deregulated in 2016. Competition has increased in recent months — energy giant Total entered the retail market in October with a promise to undercut tariffs — even as prices have remained subdued.
“After a slow start, the deregulation of the energy market seems to have accelerated lately, with the entry in the retail market of heavyweights such as Total, but also retailers such as Casino,” said Denis Florin, of management consultants Lavoisier Conseil.
“We are in a different world, open to competition and price volatility and we are competing internationally,” agreed one senior EDF executive.
As pressingly, massive delays and cost overruns at technically challenging next generation nuclear plants — such as Hinkley Point in the UK and Flamanville in France — have weighed on the company’s balance sheet.
EDF’s CFO resigned last year over risks associated with Hinkley Point. Standard & Poor’s has warned further delays would jeopardise the company’s credit rating.
In France, EDF has to find the money to keep its existing nuclear fleet operational but, in November, the company was forced to reduce its 2018 guidance because of falling demand and the cost and loss of revenue from keeping reactors offline.
About a fifth of its 58 reactors are not producing, often because of maintenance demanded by the regulator. Estimates of the cost to maintain and upgrade the fleet are close to €45bn running to 2025.
Potentially adding to that cost, Mr Hulot has extended the deadline for reducing France’s share of nuclear in its energy mix to 50 per cent from 2025 to closer to 2035, arguing the original timetable would counterproductively push up CO2 emissions. A multiyear plan outlining France’s energy strategy is due next year.
EDF at least has the support of the state in dealing with these challenges. France, which owns 83.5 per cent of EDF, recently injected €3bn into the company as part of a recapitalisation, and has committed to transforming its dividends into shares at the cost of another €3bn-€4bn. Disposals and costs savings have also helped EDF’s finances.
But Ahmed Farman, an analyst with Jefferies, argues that while EDF can fund its investments until 2020, “the company would struggle thereafter at current power prices”.
“In such a situation, pressure is likely to rebuild on EDF’s balance sheet, which we think is unlikely to be a desirable outcome for the current French government,” adds Mr Farman.
This is why the talk around restructuring is again gaining traction. A split would allow the company to access capital to invest in the renewable part of the business. Analysts hope for a higher regulated price for nuclear power that would help fund future investment.
But even if the financial engineering is workable on paper, it would not be an easy plan to implement. It “would be complicated, time consuming and would face opposition from unions”, said Mr Farman, adding “re-regulation of nuclear would need approval from Brussels which could take time”.
EDF, which was created in 1946, carries huge emotional weight in France as a unionised employer of 150,000 people worldwide.
“We have a real fear that if it is broken the model will stop operating. And you cannot put it back together,” said Philippe Page Le Merour, a spokesperson for the powerful French union CGT.
Perhaps as importantly, the French state still considers nuclear a reliable base on which the renewable energy push can be supported.
“Let’s be clear: we’re not going to destroy this investment overnight,” said one government official on the matter.
Ideol’s Mr de la Guérivière, a renewable power expert, agrees: “We have existing assets of nuclear producing at a reasonable cost so there is no need to shut them down just because of politics.”
People close to EDF say the company is not working on the split scenario. One suggestion put forward by analysts and bankers working in the sector is that the French government has pushed the idea recently to advance a necessary debate.
“I think what Nicolas Hulot was trying to say was in EDF the nuclear cannot get in the way of renewables,” said another senior government official, who added that France needed to first decide on a clear energy policy before focusing on EDF.
Clarity in terms of the energy mix and regulation is also something needed by EDF as it faces crucial decisions over future investment. If France is serious about quickly increasing the amount of renewable energy it uses, supporters say it must make it easier to develop such energy.
Others — considering the risks of projects like Hinkley Point — want the state to no longer sanction new nuclear projects in France.
“If I was Macron I would put the split on the table as a form of brutal alternative, to make it understood that there is no great option but we need to make a choice [about the future of EDF]” said one senior banker with knowledge of the sector.
The unions hope that the split is such a stalking horse. But, if not, they warn that the state will face a fight.
“For us it’s simple, if this plan is put on the table then we strike immediately . . . we will enter into an important social battle, potentially a historic one,” said Mr Page Le Merour.
EDF’s Hinkley headache
Hinkley Point C, the £20bn nuclear power station under construction in south-west England, represents a critical test for EDF’s troubled nuclear business.
The project, intended to meet about 7 per cent of UK electricity demand, involves the European Pressurised Reactor (EPR) — a water reactor design that has yet to be successfully operated anywhere in the world.
The first EPR is due to come online in Taishan, China, within weeks — four years later than originally planned. Plants using the same technology under construction at Olkiluoto in Finland and Flamanville in France are even further behind schedule, and billions of euros over budget.
A repeat of those delays and cost overruns at Hinkley would cause further damage to EDF’s finances and undermine hopes of selling more EPRs around the world.
The signs so far are mixed. EDF insists that construction at Hinkley is going well, taking advantage of lessons learned from the earlier EPR projects. About 2,400 people are working on the construction site beside the Bristol Channel in Somerset.
However, EDF in July increased its estimated budget for Hinkley by £1.5bn to £19.6bn and acknowledged the risk of completion slipping beyond the 2025 target.
EDF and its partner, CGN of China, which owns a third of the project, are responsible for all construction costs under their deal with the UK government.
In return for taking on that risk, the companies have been guaranteed a price of £92.50 per megawatt hour of electricity from Hinkley, rising with inflation for 35 years.
That is more than twice current wholesale power prices and would give EDF a return on investment of about 8.5 per cent based on the latest budget. But any further cost increases would chip away at its potential earnings.
This post originally appeared on Financial Times