Nationalization May Not Fix EDF’s Pressing Problems

The French government has announced it would fully nationalize EDF, the utility that runs the nation’s nuclear plants, which has been struggling with debt. The government has so far failed to restructure the company. The government has not yet revealed if it would buy out the minority shareholders or take control by law, but however it is nationalized, there is no guarantee it would fix EDF’s debt or its corroding reactors. More importantly, the move seems unlikely to reduce the cost of protecting consumers from skyrocketing energy prices.

Prime Minister Borne said a full nationalization of EDF, in which the state already has an 84% stake, would help France manage a transition away from fossil fuels and deal with a current energy crisis exacerbated by the war in Ukraine. However, the government’s main aim may be to secure a full control in a business that has roughly 80% share in the French electricity market. Once it is delisted, the state will no longer has to answer to any other shareholders.

EDF was listed in 2005 at €33 per share, aiming to bring more transparency to its finances and operations. Its shares now trade around €9. The state would have to pay €5 billion to buy out minority investors at current prices but is expected to offer a premium.

Macron’s plan since last year is to split EDF’s profitable renewables business from its debt stricken nuclear assets. He scrapped an overhaul last year amid opposition from labor unions and the European Commission.

About half of EDF’s 56 nuclear reactors in France are now offline, in part due to corrosion issues. EDF has repeatedly cut its planned nuclear output for 2022, just as Europe scrambles to find alternative energy sources as Russian gas supplies dwindle.

As well as problems with old reactors, the company is also running years late and billions of euros above budget in building new-generation reactors in France and Britain, raising questions about whether it has to fix fundamental design faults.

On top of those, the company is pulled back by a regulated tariff system, known as Arenh, in which it is forced to sell 100 terawatt/hours (TWh) of nuclear generation to power retailers and large consumers at 42 euros/MWh, which is well below market levels.

The French baseload 2023 contract closed at 404 euros/MWh on Wednesday, a fraction of the Arenh price. For the fourth quarter 2022 contract, the price closed at 815 euros/MWh.

EDF expects a hit of 18.5 billion euros to its profits in 2022 from production losses and a hit of 10.2 billion euro from the energy price cap.

EDF’s full nationalization could help it reduce borrowing costs on its debt, which is estimated to rise to almost €100 billion this year. However, the company’s financing needs could even rise further.

Macron has announced plans to build at least six new-generation nuclear reactors but he has not said where the 50 billion euros of investment required will come from.

With little end in sight to soaring European power prices, the French government may extend electricity price caps to protect households in winter, threatening to increase EDF’s losses.

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