EDF/French nuclear: pressurised decisions
Cash-strapped government has a strong incentive to treat shareholders well
EDF of France has discovered flaws in the manufacture of nuclear reactor parts. Details are scant. It looks like a significant setback for a nuclear-focused energy utility plagued by cost overruns and delays on big projects. The shares fell sharply on Tuesday. Time for shareholders to flee? Not necessarily.
The French energy sector is high risk for private investors. Gilets jaunes protests show the sensitivity about energy prices. Neighbouring Germany is abandoning nuclear power. EDF is 85 per cent state-owned. It is almost a ministry. But French president Emmanuel Macron wants it to be reorganised. He faces re-election in 2022, and needs to mobilise private capital for a shift to renewables.
Paris may in effect nationalise EDF’s nuclear activities by buying out minorities. That makes even more sense after Tuesday’s news. Nuclear power’s life cycles and potential liabilities make it uninvestable. EDF plans to extend the life of 58 existing reactors. That will cost at least €45bn. It is also pioneering next-generation European Pressurised Reactor technology, in China, India and elsewhere. Cost projections for its Hinkley Point project in the UK are controversial, however. In July, EDF confirmed delays at its flagship Flamanville project in northern France. Tuesday’s news hinted at fresh problems with its nuclear aspirations.
A reorganisation of EDF could involve spinning off some chunky businesses — including fast-growing renewables — into a listed EDF Vert. Ebitda from its renewables will grow by an average of 19 per cent year at least until 2023, Bernstein estimates. EDF Vert shareholders could benefit from the game of catch-up.
Germany’s energy sector has already restructured. Shares in utilities such as RWE and Eon have powered ahead of EDF stock. France’s revamp will not be easy. Brussels will watch for unfair state aid. Trade unions will battle to preserve jobs. EDF shareholders have little idea how they will be treated, or the terms of any swap into EDF Vert shares. But the cash-strapped government has a strong incentive to treat shareholders well.