EDF pioneered an energy revolution back in the ’70s and ’80s. It could do so again if the French state pursues a carve-out of its atomic assets.
So daunting is the challenge of overhauling the global energy system to prevent further catastrophic climate change, that just thinking about it feels paralyzing. It’s been done before though, at least on a national level. (1)
During the 1970s and 1980s France built scores of nuclear power plants that now provide almost three-quarters of the country’s electricity. At the time, French scientists were motivated by soaring oil prices, not soaring temperatures. But from a climate perspective the country made a good choice. Nuclear fission doesn’t produce carbon dioxide.
Today, EDF has the largest fleet of nuclear plants in the world, including 58 in France. Thanks also to its footprint in hydro-power, more than four-fifths of the power France produces is carbon-free. While the government still owns 84 percent of the share capital, EDF is something of a rarity: A publicly traded, climate change-curbing machine. (2)
Carbon Killer
The vast majority of the electricity EDF generates is low-carbon
To ensure it remains so, EDF needs to change. The French finance ministry has hired JPMorgan Chase & Co. to advise on a possible split of EDF’s nuclear and non-nuclear assets, Challenges magazine reported last week. Happily, such an overhaul might benefit long-suffering equity investors as well as the environment.
EDF’s nuclear fleet is getting old, obliging France to decide how it’s going to power the country for the next 50 years and beyond. Emmanuel Macron’s government is due to publish an energy road map in the coming weeks. A key aim is to cut the country’s dependency on nuclear generation to 50 percent of power provision, shut coal fire power plants and boost renewables. EDF wants to spearhead that change but it’s not clear how quickly it will have to shut its existing nuclear plants, not what this means for its hopes of building new reactors based on its “European Pressurized Reactor” design, which has been beset by delays and cost overruns.
The company has been boosted by the resignation of environment minister Nicolas Hulot, an opponent of the nuclear industry. Meanwhile, soaring power and carbon prices have made investors more confident about EDF’s profit potential. Since a nadir in 2017 when it raised 4 billion euros of fresh capital, the share price has doubled.
That doesn’t mean EDF’s in the clear, though. The stock remains 80 percent below its 2007 peak and the company is burdened by colossal debts, pension obligations and liabilities associated with decommissioning nuclear plants and dealing with atomic waste. Adjusted for those liabilities and offsetting financial assets, EDF’s economic net debt was about 73 billion euros at the end of December, estimates Jefferies. It’s possible that even this enormous figure understates the problem.
It’s far from certain that EDF can bear these liabilities while funding a projected 15 billion euros of yearly capital expenditure. EDF’s commitments include: 45 billion euros of investments until 2025 to upgrade the existing nuclear fleet; a two-thirds share of the 19.6 billion pound nuclear power plant at Britain’s Hinkley Point; and the addition of 30 GW of solar capacity by 2035. Unfortunately, EDF’s financial track record isn’t encouraging. Annual free cash flow has been negative for a decade, according to Bloomberg data. Only the implicit guarantee of government support has prevented rating agencies from downgrading its debt.
The state’s wariness about having to reach into its pocket again probably explains why ministers are reportedly mulling those structural changes. One scenario is a carve-out of EDF’s nuclear generation assets from the distribution and renewables business — a model followed by Germany’s RWE.
As I’ve argued before, EDF could raise capital by selling a stake in the non-nuclear assets, which markets might value more highly because of the lower risk. Facing an impending energy transition, EDF has shown real boldness once before in its history. It can do so again.
- France’s power sector is now pretty low-carbon but fossil fuels still make up a big chunk of primary energy consumption.
- From an environmental perspective, nuclear power isn’t problem-free of course. Still, I think Germany’s decision to shutter its nuclear plants when there’s an urgent need to curb carbon dioxide emissions was folly.
Source: Bloomberg
