Could Hinkley C spell the end of EDF?

EDF's apparent obsession with continuing with the increasingly financially toxic European Pressurised Reactor (EPR) programme by building another two units at Hinkley C could spell doom for EDF. Further drastic losses on Hinkley C similar to the mounting losses accrued by AREVA and EDF on the EPRs being built in Finland (Olikuoto) and France (Flamanville) might lead to what hitherto has seemed unthinkable - the break up of EDF. At least a major sell-off of assets seems almost certain if EDF is to finance Hinkley C, but if the project then went badly in the same way as the Olikuoto and Flamanville projects then both privatisation and a break up seem plausible outcomes.

Financial institutions are issuing increasingly strong warnings about the financial wellbeing of EDF, the electricity multinational which dominates the French electricity market. Both Moody's and Standard and Poor have issued warnings that EDF will face credit downgrades if it goes ahead with Hinkley C.  See http://www.thetimes.co.uk/tto/business/industries/utilities/article4574734.ece

Investec , an investment broker has urged people to consider selling shares in EDF (87 per cent of EDF is owned by the state, but 13 per cent is privately owned). The financial bulletin 'This Is Money' which has previously been very positive about the UK nuclear power programme reported this outcome and also commented: 'Future nuclear decommissioning costs in France are already set to affect EDF adversely and the bank questions whether the company has set aside enough cash to cope with this and the expense of refurbishing existing N-plants'
http://www.thisismoney.co.uk/money/news/article-3287956/Investment-bank-Investec-advises-clients-sell-shares-EDF-amid-fears-connection-nuclear-plant-Hinkley-Point-C-payouts-shareholders-threat.html. See also http://www.theguardian.com/business/2015/oct/22/broker-tells-investors-sell-edf-shares-hinkley-point-costs

The Financial Times recently reported that EDF 'looks to sell 10 billion euros worth of assets to boost balance sheet'  http://www.ft.com/cms/s/0/fcd6a462-7578-11e5-a95a-27d368e1ddf7.html#axzz3pTYWk2yt. EDF needs infusions of capital to meet the costs of the forced merger with the failing nuclear constructors AREVA, as well as its other liabilities, even before the Hinkley C 'investment' is considered. I put the word investment in quotes since there is increasing feeling in the financial community that a decision to go ahead with Hinkley C would be a huge financial risk. I would call it sheer madness. The EPR has already sunk AREVA. EDF, its nuclear client, has been drafted in to pick up the pieces. But if EDF has to absorb more EPR losses, next time there will not be a cousin company to pick up the damage. Could privatisation of EDF be a plausible outcome?

Indeed, the notion of privatisation as a general measure to reduce the debts of the French state have been discussed by Nick Butler of the FT, himself a regular sceptic about the plans for Hinkley C.
See 'Is privatisation the answer?'  http://m.ft.com/nick-butler/2014/10/12/is-privatisation-the-answer-for-france

Of course the notion of privatisation is barely on the agenda in France, and in the case of EDF it would be fiercely opposed by the left wing union, the CGT, which is very influential within and around EDF. But if EDF does go ahead with Hinkley C and the project ends up anything like as badly as the other EPR projects then EDF will be facing some very big losses indeed. Selling off more shares in the company may not be a good solution if the share price has fallen.

The French state could then be left with two options. First would be giving the bill to ordinary French people through a direct subvention of taxpayers money for EDF or an increase in electricity prices (maybe a mixture of the two) or, secondly, and here is the rub, breaking up EDF and selling off the still profitable parts to pay off the debts. So which would French people prefer, paying for mounting losses out of their own pockets, or breaking up EDF?

Of course people assume when we hear that a 'final investment decision' is soon to be taken by EDF over Hinkley C (note: a final investment decision has been about to emerge for three years now!) people assume that EDF have learnt lessons from the previous two reactors and that next time will be different. Why do people thiunk they have learnt anything? If anything, things seems to be getting worse with the other two schemes, with construction times becoming ever longer. A better question would be to turn it around and ask. Isn't it likely that Hinkley C will be a another disaster? EDF say they are going to build two reactors at once at Hinkley C! To cap it all, people have no idea whether the reactors will actually work (very well)!

Clearly too much notice is taken of EDF's pronouncements on what happens with Hinkley C. Certainly I have never thought that this project was rational. But are EDF pursuing financial rationalities? They are certainly pursuing what looks like an increasingly outdated industrial ideology with a deeply held religous zeal that defies notions of financial rationalities.  And that (via Hinkley C) may well lead EDF into the abyss.

Of course, as noted in my previous blog post, the Hinkley project has not made any serious progress in two years. It is not expected to happen any time soon, as they say. But even the possibilities that this mad project might happen is making the financial community very wary about EDF.

Hinkley C - no progress in two years

The only successful thing about the Hinkley C project is the management of the news to imply that there has been progress in the project. In fact there has been absolutely no progress, certainly not in the financial terms, and in many ways things have got worse. That is compared to two years ago when the UK Government's much criticised terms, for paying EDF £94 per MWh (2015 prices) for 35 years underpinned by a 60 per cent loan guarantee by the Treasury, were given state aid clearance by the EU Commission.

Two years ago it was being reported that Chinese companies were to take between a 30 an 40 per cent equity stake in Hinkley C. It was reported that a 'final investment decision' would be taken by April 2014 and the project would be completed by 2023.

Now we hear blazoned across the media the 'new' breakthrough of a deal between EDF and the Chinese nuclear companies whereby the Chinese will take a one third equity stake in the project. The story goes that a final investment decision will soon be made and the expected completion date is now 2025. So what has changed over the last two years? Well, not the signing of a contract between the British Government and EDF, that is for sure, since no such thing exists. All that has changed, in substance it seems, in 2 years, is that the suggested completion date has been put back by....wait for it....2 years!
If you don't believe me, read for example the latter sections of the article in New Civil Engineer of October 22nd 2013 at http://www.nce.co.uk/news/energy/french-and-chinese-set-to-dominate-hinkley-c/8654517.article
Of course we have so many announcements of an imminent final investment decision over the past three years that their value has now depreciated to vanishing point.

But while nothing of substance has changed on the status of the commercial terms, there has been a major deterioration in technical and financial context of the European Pressurised Reactor (EPR) programme. The reactors being built in Finland and France, which were already overshooting their delivery dates in 2013 are still not finished, and not expected to be finished for some time yet. Major safety flaws have been found in the reactor, which is currently being investigated by the French nuclear regulators.

AREVA, the French state owned nuclear constructor collapsed and is being absorbed into EDF. Incredibly EDF is now reported to be selling off several billion pounds of assets to absorb the consequential liabilities and to fund Hinkley C. Now why would the French state want to take the very high risk of another disastrous project at Hinkley C with the same EPR design and end up shelling out billions of pounds of euros in losses to build a nuclear power station for another country (UK)? I don't know. It sounds mad to me. It is certainly a terrible advert for state ownership of electricity companies. Moody's are warning of a credit ratings downgrade for EDF if they go ahead with Hinkley C.

My own guess is that the British Government is only keeping the PR for the project positive because it hopes to provide a smooth passage for other financial deals it is doing with China, and to preserve at least the appearance of keeping alive the British nuclear power programme.

Supporters of nuclear power like to be charitable and say that if only the Treasury lent the project low interest loans (without insurance,presumably,to make the taxpayer doubly liable!) then the project would get built relatively cheaply. Well, no it wouldn't. For one very simple reason. The Treasury would not know how much to lend. This is  because, despite all the figures bandied around in analyses by the EU Commission and many others, nobody has a good idea of how much the project will cost. The Treasury, to their favour, is not prepared to write EDF a blank cheque. Long may this remain so.

Government heading for electricity capacity price crisis in 2019

As Conservatives gear up for the next election they could be hit by a electricity crisis as the costs of subsidies for new gas power stations escalate in 2019. This is because of a triple failure of policy; its failure to realise that its nuclear power objectives are undeliverable, the failings of its 'capacity mechanism' which beckon an escalation in costs in 2019, and a failure to promote decentralised energy solutions that would avoid these problems. To cap it all, as the Conservatives implement their ending of incentives for most renewables, they end the development of low carbon solutions that will decrease electricity prices in the medium and long term.

Let's go through this carefully. First, we have discussed in this blog at length how the notion that nuclear power could be delivered at a price cheaper than even offshore wind is now is a myth. The nuclear programme will certainly not be delivered at anything like the time or scale envisioned. To boot we now rely on a huge loss making French nationalised industry (EDF soon to be merged with AREVA) to decide to make another very likely huge loss on another EPR at Hinkley C even then involving British consumers paying the incentives until at least around 2060.

Second, to make up for the shortfall in capacity the UK may experience through this failure of nuclear policy we have a market based 'capacity mechanism' through which plant are ordered, and are paid standby fees, for their ability to provide capacity when demanded by the National Grid. This system is supposed to make up for the fact that increasingly wholesale power prices are being depressed by the increasing quantities of renewable energy, thus making it unviable for power station investors to recoup their investments from sales on the wholesale power markets.
 The prices of the standby fees payable under the capacity mechanism are determined at annual auctions for contracts to supply the capacity in 4 years time (the first of which was held earlier in this year for 2018/9). The Government sets a total firm capacity figure that should be supplied through the capacity mechanism and the Government will pay the price (through electricity consumer bills), at the highest margin bid to meet the total capacity required by the Government in the future. The problem is that as old coal fired power stations retire by 2023 there is very probably going to be a tremendous 'spike' in the size of capacity payments awarded in the auctions in and around 2019.

In fact the capacity mechanism is just as much a 'subsidy' or 'incentive' as anything earmarked for renewables or nuclear, and in 2019 the size of this is set to soar. The problem for the Government, and the electricity consumer is that it is not just the new plant that receives the subsidy, it is all generation capacity except, in practice, renewable energy. Even old nuclear power plant, which are going to be kept online anyway as much as possible for technical and economic reasons, receive this subsidy. The problem will erupt around 2019 when a lot of new capacity will be needed. Various companies with plans for combined cycle gas turbines (CCGTs) are now lining up in eager anticipation to put in bids through which they will receive large payments to induce them build the new capacity. Not only will there be large capacity payments, but ALL existing generators (except renewable ones) will receive the payments. This will make the power actually supplied by the  new CCGTs, in practice, very expensive.

Against this background it is no exaggeration to  say that onshore wind is now the cheapest widely available option for new generation. From 2019 onwards it seems unlikely that once you count in the costs of paying all generators enough through the capacity mechanism to get new CCGTs built that the cost of the CCGTs will be much, if anything, less than £70 per MWh. CCGTs have been costed by Policy Exchange at around £60 per MWh, but for them to be delivered in practice a lot of money will have to be paid to the other suppliers of (old capacity). This jerks up the effective price to much higher than £60 per MWh.

But none of this will help new wind power or solar power projects. They need something known in the trade as long term power purchase agreements (PPAs) that will pay them, say, £70 per MWh over 15-20 years. But none of the electricity companies will pay them this. Moreover the Government has decided to ban even the many windfarms that now having planning consent from gaining PPAs by competing for 'contracts for difference' (CfD). These CfDs, of course are available for Hinkley C and other nuclear power proposals.

Of course there are alternatives to the Government's policy. The potential shortage of flexible capacity could be solved through a combination of, first, increasing (rather than as the government is doing, decreasing) regulations favouring energy efficiency in buildings, and secondly by encouraging through planning law and incentives the deployment of combined heat and power plant (CHP). This is an organic process that will not involve the spikes in capacity mechanism that will result from what Kevin Anderson of Scottish Power has called (last week) a 'new dash for gas'. This system works well in Denmark. Indeed the CHP plant which would be best associated with district heating systems could be converted to using, or used in conjunction with, industrial sized heat pumps, the latter which could make good use of excess quantities of renewable energy. Government estimates put the potential for CHP at massive quantities

Interestingly, the party policy that currently seems to be closest to this notion is that of the 'new left' Labour Party, whose policy, is I understand, now influenced by former MP Alan Simpson who campaigned to get the feed-in tariff system legislated in 2008. However, even if a Corbyn Government were to get elected in 2020, it will be too late to avert the coming electricity gas capacity price spikes.


For some relevant references and commentary, see:

http://www.ft.com/cms/s/0/aa73555e-6c35-11e5-8171-ba1968cf791a.html#axzz3oACYB1mw

http://www.policyexchange.org.uk/media-centre/blogs/category/item/what-exactly-is-subsidy-free-onshore-wind

http://www.timera-energy.com/pricing-dynamics-in-the-new-uk-capacity-market/

http://www.parliament.uk/business/committees/committees-a-z/lords-select/science-and-technology-committee/news/resilience-electrcity-system-report/

https://www.gov.uk/government/news/the-first-ever-capacity-market-auction-official-results-have-been-released-today

http://www.telegraph.co.uk/news/earth/energy/11925444/UK-energy-crisis-Trafford-gas-plant-in-doubt.html
http://taylorkeogh.com/news/press-release/decc-capacity-market-auction-trafford-power-gas-fired-power-project/