French Mastery of Nuclear Power at Stake in U.K. Reactor Project

  • EDF faces dilemma of whether to proceed with $26 billion plant
  • Unions argue for a delay because company's future is `at risk'

Electricite de France SA, the world’s largest operator of nuclear power plants, is stuck in a multibillion-dollar quandary that will shape its future.

Going ahead with new EPR atomic plants in the U.K. would strain the limits of its balance sheet as slumping electricity prices across Europe reduce cash flow. Dropping the Hinkley Point venture in southwest England would further damage the image of a new French-designed reactor, already tarnished by delays and cost overruns at projects elsewhere.

“This is a dilemma between a large risk on the one hand and the future credibility of the group on the other hand,” Xavier Caroen, an analyst at Bryan Garnier & Co. in Paris, said in an interview. “If EDF were to cancel it, that would jeopardize its business case for expansion in nuclear power.”

The EPR reactor design from French nuclear group Areva SA was once a symbol of the nation’s engineering prowess. EDF’s former Chief Executive Officer Pierre Gadonneix predicted it would sell “like hotcakes” around the world. Project setbacks and the safety fears following the Fukushima disaster in Japan in 2011 stymied those plans, while a flood of competing energy supplies from solar and wind has left one of the nation’s most important industries in distress.

QuickTake Nuclear Power

The two 1,600-megawatt plants at Hinkley Point would cost about 18 billion pounds ($26 billion), with China General Nuclear Power Corp. paying for a third. Standard & Poor’s is threatening to downgrade EDF’s credit rating if the U.K. project, which has been planned for more than eight years, goes ahead.

Changing Market

“The backdrop has changed a lot in the past three months in Europe, with a quite strong drop in power prices,” said Pierre Georges, a credit analyst at S&P. “Their financial situation is more stressed than a few years ago." Going ahead could add 1 billion to 1.5 billion euros in annual costs without contributing to earnings, he said.

EDF shares, 85 percent of which are owned by the French state, have lost as much as 89 percent of their value since peaking in 2007 and hit a record low on Feb. 25. French year-ahead wholesale electricity prices dropped 60 percent over the same period.

“Given current market prices, the financial equation of EDF to fund its investments is difficult because we’re already very indebted” and will be “more severely hit” by falling power prices, EDF CEO Jean-Bernard Levy warned on Feb. 16.

An EDF spokeswoman declined to comment on when the company might give the go-ahead for Hinkley Point. The company is still working on financing and a final decision is “just ahead,” Levy said.

Government Support

Internal dissent is rising. When EDF announced a 5 percent reduction of the French workforce to cut costs, union representatives on the company’s board called for Hinkley Point to be dropped or at least delayed until the reactor at Flamanville in France, or one of the two plants in development in China, are commissioned some time in 2018.

Delaying the U.K. decision would conserve cash and give the company a chance to show investors that the EPRs actually work, the unions said.

So far, the U.K. government has remained loyal to the project, saying it will create 25,000 jobs and help meet a pledge to trim carbon dioxide emissions. It has guaranteed that EDF will earn at least 92.50 pounds a megawatt-hour over a period of 35 years at Hinkley Point, which is almost triple current market rates. The French government stepped up last month, saying it will help EDF meet its commitment and taking its dividend in shares to help conserve cash.

French President Francois Hollande and U.K. Prime Minister David Cameron agreed to deepen nuclear cooperation at talks in northern France Thursday, according to a statement from the president’s office. EDF is devoting all its efforts to be in a position to announce a final investment decision for Hinkley Point in the near future with the full support of the French government, the statement said.

Areva Burden

Areva has complicated matters for EDF, accumulating 5.5 billion euros of losses on the construction of an EPR in Finland that’s already seven years late. Areva was due to take 10 percent of Hinkley Point, with EDF taking 45 percent to 50 percent and two Chinese partners holding the remaining 40 percent. As Areva’s finances worsened, it withdrew, forcing EDF to raise its stake to 66.5 percent. To make matters worse, EDF was called to rescue Areva by the French government by taking a majority stake in its troubled reactor unit.

EDF has its own problems with the EPR it’s building in Flamanville. Costs have more than tripled to 10.5 billion euros and construction is now six years behind schedule. The French nuclear watchdog has expressed concerns about the strength of the reactor vessel, forcing EDF and Areva to conduct tests to prove its safety.

“EDF is vulnerable to events over which it has no control: falling power prices following deregulation, and the balance sheet knock-on impact from Areva’s financial troubles,” said Adam Dickens, an analyst at HSBC Holdings Plc, in a March 1 report.

The company is borrowing money to pay its dividend and plans to sell assets to finance new developments. It cut annual operational expenditures by 300 million euros, or 1.4 percent, last year and plans to reduce them by a further 700 million euros by 2018. On Feb. 16, it reduced its estimate for how much it will spend to extend the life of its French reactors by 5 billion euros to 50 billion euros.

“Risks are way too high, ” Francis Raillot, a representative of the CFE-CGC union at EDF, said on Feb. 29. “We want the final investment decision to be delayed. The future of the company is at stake.”

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