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20 February 2020

EDF obsesses over nuclear, as shares suffer

EDF has continued its blurred approach to decarbonization this week, making its largest investment so far in the electric vehicle market, while simultaneously readying plans to splash up to £20 billion on the Sizewell C nuclear plant in the UK. Share prices have suffered as investors jump ship to companies which are in less of a government stranglehold and have demonstrated clearer renewables ambitions.

Starting with the good news – the EDF Group has pushed forward with its Electric Mobility Plan, acquiring a majority stake in EV charging company Pod Point in a joint venture with Legal and General Capital. But this announcement is arguably just ‘a-spoonful-of sugar-to-help-the-nuclear-go-down.’ Sizewell C, however things go, will be far more influential in determining the landscape of the utility’s future.

The development consent order (DCO) application for Sizewell C will be formally submitted “within weeks,” and is expected to include a budget of between £16 billion and £20 billion for a 3,260 MW nuclear generation plant in Suffolk. Plans will include design work from Atkins, detailing the construction plan and layout of the two EPR reactors next to the existing Sizewell B site, after the consultancy was awarded a £5 million contract last year.

The project is extremely reminiscent of Hinkley Point C – with similar budget, size, and identical players for development. EDF has even stated that it intends to deliver a 20% lower price, based on what it’s learnt through developing Hinkley Point.

But Hinkley has been a disaster in several regards. In September, a National Audit Office report exposed the project as “risky and expensive,” £2.9 billion over budget, and delayed by over 15 months – and things could easily get worse. Austria is even in the process of suing the European Commission as a result of the Hinkley project, UK, calling it a “technology of the past” which “should not be kept artificially kept alive with government subsidies.”

This has left Hinkley Point C with a strike price of over £92.50 per MWh, over double the £39.65 per MWh price offshore wind was awarded for Doggerbank in the UK’s third Contract for Difference auction last year.

But EDF’s reliance on nuclear has only deepened. A few months ago, we reported that the French government will order 6 new EPR nuclear power stations from EDF, akin to Sizewell C, over the next 15 years. With the company 85% owned by the state, EDF is largely at the mercy of President Macron’s ambitions to plow on with nuclear, and has pledged €45 billion by 2025 for life extension of its French nuclear fleet.

Running the company as a puppet organization to push the French government’s nuclear agenda has left the company with over €37.4 billion in debt, compared to its market cap of €28.4 billion. Maintaining this has meant that EDF had to sell off over €10 billion in assets last year, before considering its liabilities around pension shortfall and nuclear waste management. With the potential for 6 new EPR projects, which will be unpredictable at best, this structure has deterred investors – we reported last week that share prices had fallen by 20% in the past year.

There was slight turn in the tide last week though, and now EDF is sitting pretty much at the same value as it was a year ago. With details of the Pod Point deal emerging just prior to this, along with the group acquiring a acquired a 50% stake in Ireland’s Codling Bank offshore wind farm, we would speculate that investors are hoping that this is a sign that the renewable strategy EDF announced in 2016 is finally coming into play.

While this may bring some hope, EDF is still performing woefully compared to similar utilities like Enel, EDP and Iberdrola, which have all experienced growth of over 40% in share price in conjunction with increasing the share of non-nuclear renewables in generation to above a third. If EDF continues to pursue nuclear as a form of clean energy, this trend of falling behind will only continue.

Its not a given that Sizewell C will go ahead – and the project largely hinges on the outcome of this initial proposal, and how easily EDF can secure funding commitments. If it was to release a small modular reactor things in nuclear may be a little more attractive, but all of this so far centers on existing old designs.

The UK government will soon release the results of its consultation on the Regulated Asset Base (RAB) funding model for nuclear projects, having previously used the mechanism for infrastructure in the water sector. Such a model would see Sizewell funded by private investors who would receive a steady rate of return over the full life of the project (including construction), with consumers footing some of the bill through regulated upfront pricing.

While Sizewell would supposedly supply 7% of the UK’s electricity needs, the £20 billion bill for Sizewell is comparable to that attributed to the Severn Barrage project, which would have supplied the same amount of power at a similar cost – before it was scrapped in 2013. We would also highlight that £20 billion could also fund nearly 7 GW worth of offshore wind turbines, just shy of being able to generate the same annual power output as Sizewell C. This is also before considering the inevitable cost reductions for renewables that we will see by the time of Sizewell’s commission around 2031, when low-cost renewables-plus-storage will be feasible at scale.