Energy

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

If power companies were rewarded for not pumping out planet-warming carbon dioxide, then Electricite de France SA would be a prince among paupers. Nuclear and renewables accounted for 88 percent of the French utility's output last year, whereas coal and fuel oil contributed just 4 percent.

Yet EDF is far from being electricity world royalty. Instead, it resembles a weary performer struggling to keep an array of china plates spinning overhead, while being barked at by a government circus-master.

Prince of Low Carbon
EDF's power plants don't produce much carbon dioxide but this isn't helping its finances much
Source: EDF

On Monday, EDF shares sank 11 percent after it warned that a measure of next year's profit might be as much as 4 percent lower than expected. That might seem a stock-market overreaction, unless you're familiar with EDF's cornucopia of problems. In reality, the share slump merely reflects understandable fears about the highly indebted group.

EDF has about 31 billion euros ($36 billion) in net debt and 21 billion euros of pension obligations. It faces a 50 billion-euro bill to upgrade France's aging nuclear fleet, plus massive future decommissioning costs. Meanwhile, it must stump up most of the 19.6 billion-pound ($25.7 billion) cost of two new nuclear reactors at Hinkley Point in the U.K.

True, four-fifths of EDF shares are still owned by the French state, which offers some protection. But it's hard to feel comfortable about a utility that is struggling with cash flow. EDF expects to generate little if any cash next year, meaning net debt will remain at an elevated 2.7 times Ebitda.

It's worrying too how little control EDF seems to have over its fate. In Britain, Theresa May's government wants price caps on consumer power bills. Questions haven't gone away about how EDF can deliver Hinkley on time and on budget, judging by its efforts elsewhere. 

Back home in France, EDF faces more competition and tepid demand. It thinks electricity consumption there might fall slightly next year, something that's happening in some developed markets as people use energy more intelligently. Most important, EDF doesn't know how far Emmanuel Macron's government will pursue a promise to cut the contribution of nuclear to France's energy mix from three-quarters to about half. 

True, EDF can still pull some levers on its finances. It raised 4 billion euros of capital in March, and it's cutting cost and selling about 10 billion euros of assets. But none of this promises transformation. The market capitalization is still about the same as the cash and equivalents on the balance sheet, despite rallying 40 percent since April. 

What would help EDF is another rise in wholesale electricity prices. EU negotiators reached agreement last week on trying to alleviate a glut in carbon trading permits that has caused a decade-long depression in carbon prices.

Too Much of a Good Thing
Carbon prices slumped due an oversupplied market. Emissions trading reforms may help
Source: Bloomberg

A higher carbon price would boost wholesale power prices, notes Barclays, and cleaner utilities such as EDF would benefit most because their costs would be lower. A lasting recovery in EU carbon pricing is a way off though. Until then, EDF will just have to keep all those radioactive plates in the air. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Berlin at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net