Problems Mount for EDF As Constellation Walks Away from U.S. Nuclear Project

Constellation Plays Hard Ball

Constellation Energy, the U.S. utility group, has terminated negotiations with the U.S. government's Department of Energy (DOE) to secure a US$7.5-billion loan guarantee to build a nuclear reactor in Maryland, alongside EDF. The Baltimore-based utility said it had been forced to withdraw its application for the federal loan guarantee, in light of the poor terms being offered by the Office of Management and Budget. Specifically, Constellation was facing a fee of US$880 million, 11.6% of the value of the loan it seeks to cover. Even after the terms were altered, this rendered the project economically unviable.

Constellation's decision to walk away from the loan—and effectively from the Calvert Cliffs 3 project—follows a decline in relations between the U.S. utility and French state-owned EDF. Tensions arose over a put option, agreed in 2008 when EDF acquired around half of Constellation Energy's nuclear business, that allows Constellation to sell gas and coal-fired power stations to EDF for up to US$2 billion. At the time, Constellation was struggling to maintain cash-flow in the wake of the collapse of the Lehman Brothers bank and ensuing credit crisis. The option was intended to provide a means for Constellation to access additional liquidity if necessary, and to blunt the impact of rival bidder Warren Buffet's assurance of an immediate US$1-billion cash injection (see United States: 23 September 2008: EDF Bids to Purchase Constellation Energy). However, since then the value of the assets has declined to around US$1.4 billion, meaning Constellation could gain around US$600 million from the option while EDF faces the prospect of a loss of the same size and a fleet of unwanted assets.

Premature End of the Nuclear Renaissance or Corporate Tactics?

Constellation's bailing comes as a surprise to all parties involved. Though Constellation's move mostly gives EDF several headaches, the U.S. government has also urged the U.S. utility to come back to the negotiating table. On the one hand, EDF will be stuck with a huge loss and unwanted, underperforming assets, yet it will be much more difficult to find a substitute partner with whom to continue the Calvert Cliffs 3 project in order to not lose investments made since the project was concluded in 2008. Moreover, other joint-venture partners are not readily available. Constellation's competitors in the United States, leading nuclear power operators NRG Energy, Inc. and Exelon Corp., have their own programmes aimed at adding to and upgrading the U.S. nuclear fleet.

The U.S. government, on the other hand, has been keen to drive and support new nuclear development in the United States for its low-carbon emission qualities. To that end, a US$18.5-billion federal loan guarantee scheme for new nuclear projects was introduced last year with the intent to kick-start four new nuclear power plants (NPPs). However, with many different priorities in the air at the moment, the DOE so far has only extended one loan guarantee to Southern Co., the second-largest U.S. power producer, and Congress failed to extend the programme. The DOE said it needs to review proposals thoroughly, while it is short on staff to turn guarantees around quickly. Also, Southern received a loan guarantee of US$8.33 billion, which leaves only about US$10 billion for other projects, including the Calvert Cliffs 3 project. Yet again, the DOE is eager to see new nuclear power projects progress as a cornerstone of cleaner energy policy targets and because many of the proposed projects in the United States do not make it to the commissioning phase on account of cost hurdles or partner disagreements, as in EDF's case. The last nuclear reactor newbuild was brought onstream in 1979, and the shale gas revolution is further threatening the nuclear renaissance, resulting in natural gas oversupply and thus low prices, which in turn favours the fuel for power generation but also pressures electricity prices. NPPs need stronger price signals.

Constellation also confirms that the project is not viable at the moment, particularly with the price tag that the DOE attached to it. Costs are higher than initially expected and the U.S. utility reportedly said that project risk had risen to unfavourable levels. At the same time, Constellation is not the exactly the same company that entered into the deal in 2008. It has seen profits declining 34% in the second quarter of this year and sales were down 14% in the same time period. These circumstances also indicate different priorities for Constellation at the moment. Nevertheless, some analysts have suggested that Constellation might be engaging in a tactical game rather than a serious pull-out, trying to wring more funding and better terms from both EDF and the U.S. government. In either case, Constellation's evaluation of the general environment for nuclear newbuilds in the United States will neither facilitate additional projects nor EDF's potential quest for a new Calvert Cliffs 3 partner.

Outlook and Implications

The souring of relations with Constellation is damaging to EDF for several reasons. First, the utility is likely to be forced into acquiring loss-making fossil-fuelled generation assets, at above-market rates. This clearly runs contrary to EDF's current strategy of reducing its 25-billion-euro (US$34.6 billion) debt pile through disposal of non-core assets (see United Kingdom: 18 May 2009: EDF Ready to Auction Off U.K. Power Grid Network). Furthermore, EDF's overall relationship with Constellation and thus its foothold in the U.S. market is now in question. Calvert Cliffs 3—being developed by UniStar, the joint venture between EDF and Constellation—was supposed to act as a showcase for EDF's technical and managerial expertise in; the first of four European pressurised reactors (EPRs) to be constructed in North America as the "nuclear renaissance" spread across the world. It seems unlikely EDF will be able to pair with another firm eligible for federal loans before the remaining guarantees available under the programme are awarded to other players. Hence if EDF chooses to persist with Calvert Cliffs, it may have to finance the development through even more debt, or possibly make concessions to Constellation to keep it on board.