Brexit political chaos matters more for EDF than pound slump

Bloomberg

The political chaos since the U.K.’s vote to leave the European Union should be more of a concern for Electricite de France SA’s £18 billion ($23 billion) Hinkley Point nuclear power project than the slump in sterling.
The drop in the pound to a three-year low against the euro will shave just a small fraction off the anticipated return on the investment, EDF said last month. While the company has reiterated its commitment to Hinkley Point, the project still depends on a 35-year guaranteed power price agreed with the government of Prime Minister David Cameron, who will step down on Wednesday.
“EDF wants to go ahead with the contract as soon as it can to at least lock in that price,” said Juan Camilo Rodriguez, an analyst at AlphaValue SAS in Paris. The utility needs to avoid the risk that the next government could waver in its support for the project, he said.
Cameron said he would leave decisions about how and when to implement the split with Europe to his successor. He will be replaced as prime minister by Home Secretary Theresa May who will name a new cabinet, potentially including a new Chancellor of the Exchequer and Energy and Climate Change Secretary. While the government has reiterated its support for Hinkley since the vote, it’s already been forced to significantly revise policy to deal with the economic fallout.

Key Project
For EDF Chief Executive Officer Jean-Bernard Levy, building two so-called EPR reactors at Hinkley Point is key for the future of the French nuclear industry after projects in France and Finland suffered delays and cost overruns. The final investment decision has been repeatedly delayed by opposition from EDF labor unions, and even the resignation of the company’s chief financial officer, due to concerns the project would bring too much financial strain.
EDF presented a plan in April that it said would give it the financial strength to proceed with Hinkley Point while also making essential investments in its fleet of French reactors. French President Francois Hollande is close to backing the project, people familiar with the matter said on Monday. Even after Home Secretary May forms a new government, EDF still faces years of political and economic uncertainty as the U.K. renegotiates its relationship with the EU.

Currency Fluctuations
“Brexit and the related foreign-exchange and political uncertainty has added to challenges surrounding this project,” said Ahmed Farman, an analyst at Jefferies Ltd. “However, the French government would loath to delay it given the sunk investment in the EPR technology.”
The drop in sterling might shave 0.17 percentage points off the 9 percent annual return on the investment at Hinkley Point, because two thirds of planned capital expenditure will be in pounds and one third in euros, EDF told analysts in a June 27 presentation.
By comparison, every six-month delay on the expected completion date of the project would erase 0.2 percentage points from the expected return, the company said. French labor unions have urged EDF to delay the project by about three years to allow similar reactors in France and China to be completed. EDF says it has already gained knowledge from these projects it can apply to Hinkley.

Costly Subsidy
EDF will fund two-thirds of the construction of Hinkley, with China General Nuclear Power Corp. paying the rest. The U.K. government would guarantee, using a so-called contract for difference, that the project would receive 92.50 pounds for each megawatt-hour of electricity generated over 35 years.
That’s more than double current prices. The subsidies are projected to cost 37 billion pounds over the lifetime of the plant, more than twice the estimate made a year ago following a drop in wholesale power prices, according to data published on a government website July 7.
While the U.K. still really needs the power Hinkley would provide, particularly when supplies are most stretched during the winter, EDF needs to consider the heightened political risk, said Rodriguez at AlphaValue.
“If the government is less pro-nuclear than that of Cameron, they might lookfor a plan B regarding Hinkley Point,” Rodriguez said.

France’s EDF buys Chinese wind energy firm

AFP

State-owned French energy giant EDF said on Tuesday it had taken a controlling stake in Hong Kong-based Chinese firm UPC Asia Wind Management (AWM), adding to a range of activities in China.
EDF, which did not reveal what it had paid for the 80 percent stake in AWM, the local arm of UPC China, already has nuclear activities in China, as well as a presence in thermals and hydraulics.
US investment fund Global Environment Fund (GEF) will retain a 20 percent share of AWM, said EDF, which last year dubbed China the centre of gravity of the global energy industry.
The French firm, which highlighted its view of China as a priority growth market, is present in a swathe of Chinese cities, notably with a stake in a nuclear plant at Taishan in the south.
“Our ambition is to accelerate our production of low-carbon electricity, thanks to a diversified energy mix where nuclear and renewable energies are complementary,” said EDF’s CEO Jean-Bernard Levy.
“Our development in high potential markets such as China sit perfectly within this dynamic,” he added in a statement.
China’s recent high growth environment has seen energy consumption rise exponentially in recent years and carbon currently has a 70 percent share in the mix.
However, Beijing’s “ambition is to reach 200 gigawatts of installed windpower capacity by 2020 — a rise of 15 GW per year,” said EDF.
By the end of 2014, China already had surpassed the United States as the country with the world’s largest installed base of wind power at 100 GW.