A new report from the Public Services International Research Unit at the University of Greenwich casts doubt on the ability of the nuclear industry to deliver its promised new reactors. The report "Areva and EDF: Business prospects and risks in nuclear energy", published on June 16, is written by Professor of Energy Policy Steve Thomas and commissioned by Greenpeace International. It examines the financial situations of EDF and Areva and, in particular, what the impact of problems at the Olkiluoto (Finland) and Flamanville (France) nuclear construction sites will be on these companies and their shareholders. It looks at how dependent these companies are on the achievement of their objective to obtain orders for at least 35 more EPRs in the next decade and it examines what part these companies will have in financing these orders.
The ownership of both companies is dominated by the French government and the government has consistently used its ownership of these companies as an arm of government policy. For example in the 1970s and 1980s, EDF and Areva’s predecessor, Framatome, was given whatever resources and backing needed to carry through the government’s nuclear ambitions. The French government continues to use these companies as a policy instrument and is therefore unlikely to want to lose control of these companies. While there is a likelihood that the French government will sell some more EDF shares and that private capital will come into Areva, for example through Bouygues, ownership is likely to continue to be dominated by the French government. For the foreseeable future, the shareholders of the two companies will essentially be the French government, especially after the withdrawal of Siemens from Areva NP. The withdrawal of Siemens from Areva NP, apparently because it was unable to influence Areva NP’s policies sufficiently, will also remove a potential obstacle to the French government influencing Areva’s policies to meet its own priorities. However, the withdrawal of Siemens from Areva NP does present financial problems because of the need to find the capital to buy Siemens out. It remains to be seen whether it will lose significant technical expertise and how quickly Siemens can emerge as a major competitor in nuclear markets.
Government ownership is a strength and a weakness to both companies. It gives both companies huge financial strength and strategic backing in world markets, for example through loan guarantees for exports orders. However, the French government’s policy objectives might not always align with the corporate interests of the two companies. For example, the French government could impose restructuring on Areva, such as privatisation, merger with Alstom or a partnership with Bouygues, which are not in Areva’s own interests.
The French market for Areva and EDF
Any plausible cost overruns at Flamanville, which will represent less than 2% of EDF’s generating capacity in France, can probably easily be absorbed, while the output is not needed to meet French demand so construction time overrun will also have little impact. However, it seems implausible that the European Commission will allow EDF to continue to have a de facto monopoly in the French electricity market and at least one major competitor, probably GDF Suez, is likely to be given or allowed to take a significant proportion of the market. What this will mean for the existing nuclear plants is far from clear. Transferring a proportion of them to a competitor would be highly contentious and would be fiercely resisted, but even if EDF retains these, it seems likely that EDF’s ability to use its French customer base to underwrite foreign investments will be reduced. The proposal to extend the lives of the existing plants to 60 years probably makes economic sense to EDF. However, if the plants were kept in operation for an additional 20 years, the market for EPRs in France would be very small and it would make it hard for EDF to retain its capabilities as a nuclear plant designer and engineer.
For Areva, it will be difficult for any competitors to make any impression on the French market share but even the threat of limited competition could erode Areva’s profit margins.
The company’s reprocessing business is likely to shrink unless the trend to plan to dispose of spent fuel directly is reversed. EDF will be reluctant to reprocess its spent fuel if, as seems likely, direct disposal is cheaper. EDF’s proposal to extend the lives of its existing plants to 60 years means that the huge replacement market for reactors in France that Areva was expecting would dominate its EPR sales is effectively indefinitely postponed and its future reactor sales can only be a small proportion of those previously expected.
EDF has adopted a new policy in the last year of investing heavily in electric utilities in markets where it hopes to build and operate EPRs and it has announced it expects to invest up to €50 billion (US$ 70 billion) in new nuclear power plants worldwide by 2020. In the UK and the USA, EDF has bought existing nuclear power plants as well as planning to build new ones. It has bought British Energy for about €15 billion, 49.9% of Constellation’s nuclear assets for about €6bn (USA). Its British Energy and Constellation investments have been criticised for being overpriced.
Losses with existing plants can mount up very fast, as was illustrated in the UK in 2002 when British Energy collapsed alarmingly quickly because the cost of its power fell marginally below the market price. If the nuclear markets in USA and UK do not materialise, EDF could be left with some very expensive assets of limited value. For China, EDF has taken a minority stake in a company building new nuclear plants, while its role in South Africa, if any, is not yet clear. If the projected sales of EPRs other than those in USA and the UK do not materialise, the impact on EDF will probably not be major. It would have acquired the resources it would need to fulfil these plans and if the plans do not materialise, it will simply not acquire these resources.
Areva is also investing heavily in foreign markets, especially the USA, where it is expecting to build major new facilities. For future reactor sales, Areva NP is heavily committed to just one reactor design, the EPR, with its other options a long way from commercial application. Its projections of reactor sales do not seem realistic and if the manufacturing facilities it is building are left under-utilised, this could be costly to them. If the EPR continues to encounter technical problems or if the US (or UK) safety regulatory processes throw up significant issues, Areva NP will have serious problems remaining a credible reactor vendor, especially after its errors with its previous design, the N4. Unless it can salvage the Olkiluoto project, which is three years late and at least 50% over-budget, very quickly, the damage to its reputation will be severe. Prospective customers will hardly be impressed by a vendor locked in a bitter struggle with one of its customers, appearing to try to renege on a turnkey contract.
Finance, debt and credit ratings
Both EDF and Areva have long had a stream of secure business with limited competition that dominates their financial position. In the case of EDF, it is the French electricity market, where it has an effective monopoly over most sectors of the market. For Areva, there are its reactor servicing and fuel supply businesses especially in France where it has had a market for the 58 operating reactors with little realistic competition. These large, relatively secure markets are on such a scale that the losses even from major failures such as the Olkiluoto project and perhaps the Flamanville project can be absorbed over 3 or 4 years with relatively little impact on their overall profits. They have also allowed the companies to take on relatively risky investments, such as EDF’s investments in South America secure in the knowledge that these would be underwritten by their core businesses. However, both companies appear to be moving in to a period where these secure businesses will become more risky. This comes at a time when their strategic plans call for major investments, which will tend to significantly increase their debt levels, perhaps putting their high credit rating at risk. Both companies have said they want to sell existing businesses to keep their indebtedness under control, but whether they can find businesses to sell that will not damage their corporate prospects and will raise enough money to achieve this remains to be seen. A weakening of their credit rating will have consequences that will be felt throughout their businesses.
Source: "Areva and EDF: Business prospects and risks in nuclear energy." Steve Thomas. Professor of Energy Policy. Public Services International Research Unit (PSIRU). Business School, University of Greenwich, U.K.
The report is commissioned by Greenpeace International and available at: http://www.greenpeace.org.uk/files/pdfs/nuclear/Areva_EDF_Final.pdf
Contact: Greenpeace International, Otto Heldringstraat 5, 1066 AZ Amsterdam, The Netherlands.