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10 October 2019

If you were EDF how would you get out of nuclear?

Companies get obsessed with their existing strategy and quite often cannot see the wood for the trees, or devise a new strategy internally. We see it in tech firms like IBM, and more modern ones like Facebook, and we see it in our world of energy, when renewables become the new toy to be played with, and then discarded when large energy combines get back to what they believe they are good at.

In EDF’s case, it is a company that is clearly not very good at very much. It is a conventional energy company that has a subsidiary that is dedicated to renewable energy, but somehow, it continues to make most of its money from nuclear, despite its inability to ever hit a single deadline.

The UK, China and Flamanville in France each have EDF nuclear projects which are in various stages of progress – the UK’s Hinckley Point C was recently delayed at an estimated cost of £2.9 billion ($3.55 billion), and in the past the Chinese dual reactor plant in Taishan was two years late.

This week EDF announced that there was more trouble at its long-troubled flagship Flamanville next-generation European Pressurized Reactor due to a site inpsection revealing that it had faulty welding.

This is usually the issue, safety is a watchword after the nuclear accidents of the past and the insidious nature of radioactivity. Inspections were not undertaken fully at some nuclear plants in to the past, such as Fukushima, so they are contractually written in. The problem with that is that if an inspection throws up a problem, the cost of putting it right is far too tough on the contractors, so there are clauses that allow for inflating of the costs, and hence the need for government backing on most nuclear projects.

This gets us into the habit of pressurizing government minsters with threats of the lights going out in their country on their watch and usually they agree to high cost projects and project overrun costs. Also it means government minister seem to believe that nuclear is preferable, otherwise why are we spending all this cash on it, and writing a blank check. It’s no wonder they fail to understand renewables.

At Flamanville this week an additional €1.5 billion will brings costs up to €12.4 billion and a delay until 2022, before it will have any nuclear material loaded – another project more than two years late.

The nuclear industry is the only manufacturing business where you can tell the client that you have done something wrong, and where the client pays you to put it right. Imagine having that in renewables – you could put up any old wind turbine and just shrug and say, if you want more power you can put up another, or a bigger one and ask the customer to get out his check book.

This then is the reason that EDF has only these projects on its nuclear books and why it has begun the slow task of opening up renewables, but continually fails to grow that side of the business at breakneck speed. Its management is quietly hoping that a design for a small modular reactor will come through to implementation stages, and it can “get back to what it does” blackmailing governments into paying cost plus contracts for doing a god-awful job. It’s like an unholy merger between capitalism and socialism and we have a name for it, “money for old rope.”

Which is why the EDF share price has fallen over the past five years from €25 to just over €9, and its valuation from €75 billion to €28 billion. What it should do is accelerate renewables, keep its existing nuclear plants running to end of life and beyond, and not even try to build any more nuclear plants. As we said, the obvious is so often not obvious to the company itself.

It probably satisfies itself that other nuclear projects such as the Olkiluoto project in Finland (ten years late), are far later than those run by EDF, so perhaps they are in fact quite good at building nuclear (although Fromatome which built that reactor ended up being sold to EDF).

EDF has instead gone with the internal reorganization plan codenamed Project Hercules, which is to create a French government-owned mother company, EDF Bleu, containing the nuclear and hydro assets – the company’s historic successes so to speak, and EDF Vert, which will house renewable energy, grids and services and actually be commercial. Given that 50% of all jobs in France are with the government, we know where all the talent will want to live.

Either way it needs to get on with it, before its value slides into the negative. As usual the reasons for delay in implementing this split is that EDF like many other large public bodies, believes it is too important to fail so should have terms that guarantee it a solid future. French nuclear generation and regulated business makes up 78% of EDF’s business, and renewables just under 5%, but this is because it keeps selling of parts of the business – not the nuclear business, the renewables. Other reasons for not completing this split will be to ensure that changes under President Macron don’t put EDF foul of things like pension reform.

Throughout its half yearly figure EDF concentrates almost entirely on how its renewables business has gone, but if you cut EDF, it bleeds radioactivity.