Tuesday, 27 October 2015

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.


  1. But imagine if they could securitise the CfD - that looks distinctly like an AAA annuity stream ...

    1. well, assuming the plant worked properly...but even assuming it did, that's not the point, The problem is the costs which are likely to break EDF and anyone else who tried to underwrite them. Nobody else will of course, including the British Government.