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Little room to maneuver as talks over EDF's future go down to the wire

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Essential Energy Insights - January 2021


Little room to maneuver as talks over EDF's future go down to the wire

SNL Image
A worker at an Electricité de France wind farm. The utility's profitability is weighed down by an expensive and unprofitable nuclear division, but a ring-fencing of the division is opposed by workers unions who fear layoffs and a divergence of conditions across the group.
Source: Electricité de France

Political wrangling over nuclear compensation and the future structure of Electricité de France SA, France's largest utility, is going down to the wire. Reforms are seen as necessary, but the path to an agreement is rocky, and time is of the essence.

A planned reorganization could see Electricité de France, or EDF, split into a fully state-owned holding company code-named "EDF Blue" to manage its nuclear power plants and a listed business made up of its renewables, distribution and supply units called "EDF Green." EDF's hydropower activities could be moved into a separate state-owned division dubbed "EDF Azure."

Importantly, the discussions over the future of the business also include a proposal to lift the price EDF can charge retail competitors such as Engie SA or Total SE for its nuclear production.

The move would end the so-called ARENH nuclear regulation, under which EDF sells about a quarter of its annual output, or about 100 TWh, at a fixed price of €42/MWh. ARENH was implemented in 2012 to foster competition in the market and since then has driven down EDF's market share.

Agreement on the nuclear remuneration framework needs to be sorted out before a reorganization of EDF can take place, said Claire Mauduit-Le Clercq, senior analyst at S&P Global Ratings. "Without the starting point of reregulation, you cannot jump into the second phase, the reorganization," Mauduit-Le Clercq said in a Feb. 3 interview.

Reform 'extremely important'

While there is little official information showing what the new regulatory agreement may look like, it could simply raise the fixed price that EDF receives for its nuclear output or could introduce a price range, also resulting in higher compensation.

As it stands, the regulation effectively stipulates a price cap but no floor for EDF's ARENH output, exposing the business to downsides of the market but not upsides, said Antonio Totaro, deputy head of Fitch Ratings' utilities and transport group in Europe, the Middle East and Africa.

"The reform is extremely important because it would make these assets profitable again. We believe that is a key driver to preserving the financial strength of EDF," Totaro said in a Feb. 4 interview.

While a reform could see consumer electricity bills go up, it could be a game-changer for the utility and its ability to invest, for example in renewables.

"You could have an EBITDA improvement in the region of billions, not millions. And not only a higher figure but a much less volatile figure," Totaro said.

No split 'in an ideal world'

But such a shuffling of the deck could lead to complications, some of which are political.

The nature of the potential separation of the nuclear division is the subject of debate between the French government and the European Commission, Europe's competition watchdog.

The commission would like the nuclear unit to be sectioned off from the rest of France's retail market entirely amid concerns over state aid and creating an uneven playing field if EDF can charge rivals higher prices.

EDF's behemoth nuclear fleet includes aging assets that will need billions to maintain and repair in the coming years. Moving that project into the hands of the state could enable EDF to focus and spend on its planned renewable energy ramp-up.

A breakup of the company is vehemently opposed by workers unions concerned over job cuts and a divergence in conditions across the business. Many have already struck against the plan, and while he is not altogether opposed to reorganization, French President Emmanuel Macron also pushed for jobs to be preserved and for all parts of the group to have the same access to capital.

"EDF in an ideal world, and those are Macron's own words, would like to remain integrated," Mauduit-Le Clercq said.

Clock is ticking

But in this case, there may not be an ideal world. While much of the political momentum in France may be against a full separation of the nuclear unit, Brussels is seen to have little reason to compromise on the issue, and France is under time pressure to reach an agreement given its election calendar.

EDF declined to comment on the process, saying that negotiations are between the government and the commission.

Delaying the talks further could make it difficult to obtain the approval of the French Parliament for any restructuring ahead of presidential elections scheduled for April 2022, although even now, the green light is not guaranteed, depending on the proposal. Centrist Macron is up for reelection, and the support of future governments is not certain, with the socialist party opposed to a breakup.

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Some analysts expect the adjustment of the ARENH mechanism and subsequent reorganization of the company to be too important to fail. But the clock is ticking.

"[They] have a few months to reach an agreement. ... Either it is done soon or it goes into 2022. And then it depends on the attitude of the new government," Fitch Ratings' Totaro said.

At a Feb. 4 parliamentary hearing, Minister for the Ecological Transition Barbara Pompili said there is no certainty that an agreement will be reached with Brussels over the future of EDF, according to French newspaper Le Figaro, with the government unwilling to agree to a harsh split of the company. "The status quo is not sustainable over time," Pompili said.

Current nuclear compensation rules contribute to a negative cash flow to the tune of €2 billion to €3 billion per year for EDF, Mauduit-Le Clercq pointed out.

"Time is not playing in EDF's favor. Each year the regulation is not implemented, the debt is increasing," she said.

If nothing changes, the ARENH rules are set to run until 2025. If hurdles such as opposing unions block an agreement, the status quo remains, possibly with negative ratings and share price implications.