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EDF's financial woes discourage electricity investment in UK

20 Feb 2013 16:23:43 | edem

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EDF's difficult financial situation will cut into its ability to invest in new capacity in the UK, said French sources close to the company.

The current price tag of €8.5bn for building one 1.6GW reactor in the UK is almost equivalent to the estimated €10bn it will cost to implement stress-test related safety measures to all of EDF's 63GW French nuclear capacity, said Jean-Jacques Nieuviaert, senior advisor for strategy and economic studies at the French Union of Electricity (UFE).

The company is facing multiple financial problems, sources say. These include a tariff deficit based on the difference between regulated tariffs paid by EDF's customers and its long-term investment cost, large amounts of debt as well as the cost of implementing post-Fukushima stress test-related modifications.

Another problem is the CSPE levy, which is paid by consumers, but is too low to cover all of EDF's costs from supporting renewable energy, providing electricity at a reduced tariff for energy-poor consumers and charging equal rates throughout the country and in France's overseas regions.

"Clearly the situation is not good. Overseas operations are stagnant and tariffs in France are too low," said a source close the matter, who chose to remain anonymous.

Asset sales are not a viable option given current economic conditions, said the source.

Investments

EDF's investment target is €15bn until 2015, but sources have indicated even €12bn could be difficult to achieve.

"In this context, the investment in the nuclear power plant in the UK will be a very big deal to take on at the current price of €8.5bn," said the source.

Tariff deficit

EDF's tariff deficit problem stretches back to 1985, said a source. "EDF has lost a huge amount of money in the last 27 years. In 2010, the blue tariff was at €160.00/MWh; it is now at €120.00/MWh." said a source.

According to Fabien Roques, senior analyst at IHS CERA Global Insight, current tariffs paid to EDF do not reflect the company's long-term production and investment costs.

"The tariffs are not below EDF's short term costs, but considering that nuclear capacity is cheap to run but long-term costs are high, current tariffs deter investment. This system can only work temporarily," he said.

Debt

Other problems include spiralling debt, currently at €42bn, up from €33bn in 2011. According to one source, considering expected low power demand in 2013 because of economic conditions and a mild winter, the company will struggle to maintain earnings for the coming year stable in relation to 2012.

CSPE

Another weight on EDF's balance sheet is the €4.9bn that the government owes to the company in relation to the CSPE levy and associated interest.

The levy increases periodically, and rose from €10.50/MWh in 2012 to €13.50/MWh in January 2013. This is below the €18.80/MWh that France's energy regulator CRE said would be needed to cover EDF's costs, which include buying energy produced from renewable sources at a feed-in tariff higher than market rates (see EDEM 19 December 2012).

"The reason for the €3.00/MWh increase was clearly political," said a source.

The government has confirmed its commitment to pay back the €4.9bn to EDF by December 2018, but sources have indicated this may be difficult to achieve (see EDEM 14 January 2013).

ARENH

EDF faces another problem in the ARENH tariff, which was introduced in 2011 as a market liberalising measure. The tariff obliges EDF to sell part of its nuclear generation to competing suppliers at a fixed tariff currently at €42.00/MWh. But falling market prices mean the tariff may one day be higher than market prices, effectively invalidating the system.

"If market prices were below the ARENH tariff, there would be no point buying from [EDF]," said Roques. "And the ARENH tariff reflects the cost of the historical nuclear park, so it cannot be reduced because market prices are lower."

"But I am not sure market prices will drop," said Roques, indicating bearish factors such as low carbon prices may be temporary.

EDF was unavailable to comment. Beatrice Mavroleon

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