Wednesday, 1 August 2012

Électricité de France (EDF)

The state backed behemoth that is shaping the nuclear industry

When E.U heads’ of state promised to reduce carbon emissions by 80% by 2050, the world seemed a more agreeable place. The dilemma now flaring up between nuclear, wind and fossil fuels has left some wondering how the E.U intends to keep the lights on.

One company which will shape the nuclear future is the French state colossus, EDF. The company owes its origins to a nationalisation of over 1700 energy minions by the then industry minister Marcel Paul. The French government used the firm to drive an economic revival following WW2. It has been of “strategic” importance ever since.

However, beginning in 1999, the firm has gradually been exposed to market forces. EDF was compelled to share its monopoly over French energy markets, ceding 20%, under the instruction of the E.U commission. This was followed in 2004 by the floating of a 15% stake in the firm on the CAC 40. (See graph)

Chart forElectricite de France SA (EDF.PA)
Just  Fukushima and the Eurozone?

Private investors have been unimpressed. From a high of €80 the stock has dwindled to €16 today. Mr Porgolio, group CEO, cites the Eurozone debacle and Japan’s Fukushima disaster as drags on performance. This has some substance to it, Since Fukushima, rival firms’ stocks have also plummeted, yet EDF leads the pack in poor performance.

The nouveau président français may have something to do with this. Prior to the election, François Hollande promised to cut nuclear energy dependency from 75% to less than 50%. Yet on arrival to the Elysee Palace this has become more an “aspiration” than a “policy” as Monsieur Hollande seeks to grapple with réalité.

Policy or not, Hollande is not Porgolio biggest fan. The EDF CEO campaigned rigorously for the now departed Sarkozy and slapped down Hollande’s energy plans as “unrealistic”. Rumours have sprung up suggesting Porgolio may not see out his 5 year term to 2014.

The double edged sword for EDF is that it exists at the behest of the French government. The firm advanced in the 70s as France looked to reduce its exposure to oil price volatility. Its fortunes may now turn the other way.   

Don’t write nuclear or EDF off just yet   

Just as Hollande begins to grapple with the practicalities of government amidst the see of promises he made in opposition, so the UK coalition are waking up to the implications of their own green energy promises.

The Liberal Democrats have long modelled themselves as the clean energy party, and the Conservatives have played up their green credentials, yet their coalition is looking likely to commit the country to a new era of new nuclear power stations. The Hinckley point plant in Somerset next year, should a deal with EDF be agreed, will be the first since 1995.

EDF UK head, Vicent De Rivaz, sees the Somerset deal as crucial to the group’s attempts to diversify from French income dependency and the UK government’s efforts to move away from fossil fuels.

Still, the plan could go awry. When the Blair government announced its commitment to new nuclear, energy back in 2007, energy giants boasted they could build without any sort of subsidy. This now looks misguided as additional safety costs following the Fukushima disaster are driving up the cost of nuclear. A look across the channel reveals just how costly it may turn out to be. Flamanville, the site of a new nuclear plant managed by EDF, has run over budget, by around double, and time, by over 4 years. This hardly bodes well for the new nuclear revolution.

It is therefore unsurprising that not many firms are willing to get involved in British nuclear renovation. EDF and Centrica, a rival firm, are now the only two companies willing to part with capital. Hence the government is trying to concoct schemes to tempt investment. The latest idea is a “strike price” for the price of energy per megawatt hour (MW/H). Essentially, the government would subsidies firms if the price of energy were to fall below the agreed price.

EDF agree in principle to this pricing strategy, but not in detail. The current price of energy stands at 41 MW/H. EDF is hoping to get a strike price of potentially over £100 MW/H. Given that offshore wind generation comes in at around £130 MW/H some are wondering whether the government should bother with nuclear at all.

EDF also faces grumbles from its UK customers. The firm was recently fined over sales practices to the tune of £4.5m. Customers on This Is Money, a popular consumer finance website, rate the firm bottom of the big six for customer service every year. With energy bills shifting from £422 in 2004 to £1258 today, expect many more irate consumers.

Like its main backer, EDF suffers from large debts and low productivity. Some are hoping nuclear will make a comeback in a more efficient form. Whether it does, is partly down to EDF. 

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