Explainer-Why a French plan to take full control of EDF is no cure-all

·4 min read
The EDF logo at the company's headquarters in Paris

By Silvia Aloisi and Forrest Crellin

PARIS (Reuters) - The French state has said it will fully nationalise EDF, the debt-laden utility that runs the nation's nuclear power plants and which the government has so far struggled to restructure.

It has not said whether it will buy out minority shareholders on the market or take control by law. But however it is nationalised, it doesn't guarantee a fix for EDF's mountain of debt or its corroding reactors and it won't reduce the cost of shielding consumers from sky-high energy prices.

SO WHY DOES THE GOVERNMENT WANT TO NATIONALISE EDF?

Prime Minister Elisabeth Borne said a full nationalisation 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.

But analysts say the government's main goal may be to secure a freehand in running a business that has a roughly 80% share of the French electricity market, once it is delisted and the state no longer has to answer to any other shareholders.

EDF was listed in 2005 at 33 euros ($34) per share, aiming to bring more transparency to its finances and operations. Its shares now trade around 9 euros. The state would have to pay 5 billion euros to buy out minority investors at current prices but is expected to offer a premium.

President Emmanuel Macron, who was re-elected to office in April but who lost control of parliament in a June vote, scrapped an overhaul of EDF last year amid opposition from unions and the European Commission to his plan to split EDF's profitable renewables business from debt-laden nuclear assets.

WHAT'S GONE WRONG AT EDF?

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, it is also running years late and billions of euros above budget in building a new-generation of reactors in France and Britain, raising questions about whether it has to fix fundamental design faults.

Furthermore, EDF has been hobbled by a regulated tariff system, known as Arenh, forcing it 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.

This year, the government also raised the amount of power EDF had to sell to competitors at a low price, seeking to shield consumers from surging energy prices but adding to EDF's costs.

EDF's already creaking finances are under even greater strain because the group sells forward its estimated nuclear output before the end of the budget year and has to buy back sold electricity in a volatile market with prices now at historic highs.

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.

WILL BEING UNDER FULL STATE CONTROL FIX EDF'S WOES?

Probably not.

A fully nationalised EDF may be able to reduce borrowing costs on its debt, which rating agency S&P estimates could rise to almost 100 billion euros this year. Yet, the group's financing needs could rise even 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 deepen the group's losses.

Meanwhile, opposition to any shake-up plans is unlikely to melt away just because the state is in full control.

Unions worried that the government wants to break the company up are unlikely to find a restructuring any more palatable and, regardless of ownership, the European Commission will still closely scrutinise any of the government's plans.

A key element of the previous restructuring plan, known as Project Hercules, was to reform the mechanism for regulating prices at which EDF sold nuclear power. JPMorgan expects France to set a guaranteed price for the whole of EDF's nuclear output.

The European Commission needs to approve any tariff changes to ensure EDF's more profitable businesses do not subsidise loss-making parts.

(Writing by Silvia Aloisi; Editing by Richard Lough and Edmund Blair)

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