Will it all come to nothing? Artist's impression of the planned Hinkley C nuclear power station. Image: EDF Energy.
From one disaster to the next - Hinkley C's last days?
13th May 2016
Another week, another series of disasters for EDF and it's Hinkley C nuclear power project, writes Oliver Tickell, with the company's credit rating downgraded partly due to its exposure to the project, and its Chinese partner CGN ruling out a takeover of the site. How much longer can the tragicomedy continue before the curtain falls?
So this is the nightmare scenario. What if it turns out a lemon? Then EDF will have turned £21 billion of good money into a massive decommissioning liability - more than wiping out the company's entire present equity value of £17.1 billion.
The remarkable thing about the ongoing Hinkley C fiasco is just how long it's going on - and how one disaster piles onto another without the project ever quite dying - so far at least.
Today's news? Moody's credit rating agency has just downgraded EDF's debt from A1 to 'A2 outlook negative'. OK, that's still not junk grade - after all the company has the French government standing behind it as 85% owner.
But the A2 negative rating will make it all the harder and more expensive for it to raise the cash it needs - not just to build Hinkley C but to finance its forced €2.5 billion takeover of insolvent nuclear components manufacturer Areva, make good its problems, finance the impending closure and docommissioning of its own aging nuclear fleet ... you get the picture.
And Hinkley C is an important cause of EDF's sinking down the credit rating charts. "The negative outlook", writes Moody's, "reflects ... the incremental risks associated with the Hinkley Point C (HPC) nuclear power station project in the UK, should it go ahead."
"The outlook could be returned to stable provided that (1) EDF decides not to proceed with the HPC nuclear project", the rating report continues, helpfully adding: "The ratings could be downgraded if (1) the HPC project were to go ahead".
And if you ask me, that gives an unusually clear steer to the company as to how they can please credit markets and cut their borrowing costs - something that's actually very important for a company quite so deeply indebted as EDF.
Also this week: EDF's projected cost of building Hinkley C just took a £3 billion hike from £18 to £21 billion - though still well short of the £24 billion widely expected elsewhere.
The company also revealed that it expected 115 months (9.5 years) to pass between a final investment decision until the commissioning of the first of the two reactors. In other words, it's pretty well impossible for it to begin before 2026.
EDF CEO Jean-Bernard Levy also revealed in February that "Definitive construction of what will be built on the site, what we call the first concrete, is on the horizon for 2019" - hardly an indication that action of any kind is imminent.
Areva's 'falsified' safety certificates for nuclear components
And what was it happened last week? Oh yes, it turned out that Areva has been systematically "falsifying" (by the company's own admission) safety certificates for components it has made for nuclear power stations, with 400 such 'irregularities' including to 50 components in operational nuclear reactors.
This is very bad news for EDF not just because the French government is forcing it into a shotgun takeover of what is clearly a company in deep trouble, but because many of these 50 components will be in its own power stations. And if it sues ... it will be suing itself.
It also raises serious safety questions over the EPR reactors planned for Hinkley C, and under construction at other sites: Olkiluoto in Finland, Flamanville in France, and Taishan in China - not only for the components whose safety certificates were falsified, but for everything the company has ever produced because of what it reveals about its deeply dysfunctional safety ethic.
The news of the falsified safety certificates may also explain how the reactor vessel and head supplied by Areva at Flamanville went so far as installation at the heart of the plant while suffering from grave metallurgical defects owing to an excess of carbon in areas of the steel, that could lead to embrittlement and cracking of the unit.
This safety problem remains unsolved and in a worst case (for EDF, Areva and French taxpayers) could lead to the power plant's total abandonment. It is also widely suspected that the two Taishan reactors, also forged by Areva, may suffer from the same defect.
Meanwhile all curent EPR projects are massively over time and budget. Flamanville, begun in 2006, was meant to be complete by 2012, and costs have more than trebled from €3.3 billion to €10.5 billion, with no end in sight.
Construction of the Olkiluoto EPR began in 2005 and it is not expected to commence operating until 2018, nine years late. The estimated cost has risen from €3.2 billion to €8.5 billion. Areva has already provided for a €2.7 billion writedown on the project, with further losses expected. Meanwhile the Finnish utility FTVO and Areva / Siemens are locked in a €10 billion legal battle over the cost overruns.
Which reminds me. Moody's again: "The A2 rating is based on Moody's expectation that EDF will have no material exposure to AREVA NP's liabilities associated with past and existing contracts in its engineering and construction business, including the Olkiluoto 3 nuclear project in Finland."
Just how they expect to achieve that when EDF is buying the company is hard to understand. That A2 rating could drop even lower.
Those legal cases in the European Court
But that's not the only legal case that could mess things up for EDF. Austria and Luxembourg have a legal challenge in play against the European Commission for approving an absurdly generous subsidy package for Hinkley C that is set to pay the company almost three times the current wholesale power price for 35 years after it begins to produce power.
A second case was filed in March 2015 by Germany's Greenpeace Energy and a host of other cooperative and municipal green energy suppliers concerned that the massive subsidy would cause prejudice against renewables in Europe's energy market.
And last month, new legal risks: UK green electricity supplier Ecotricity and Greenpeace UK are threatening further legal action over the French government's plan to support EDF's wobbly finances by taking dividend payments as shares instead of cash, and buying billions of euros worth of additional shares, in order to provide working capital for Hinkley C.
The share purchases actual and proposed, they warn, fall under EU state aid rules and would need to be approved by the Commission before they could go ahead. Any attempt by EDF to sneak a massive share issue out to the French government would be challenged in the courts.
And the simple fact is that state aid is the only way that Hinkley C will ever be built. Private investors won't touch it with a bargepole, and here's why. In theory the project offers investors an enviable 9% rate of return. But that's only if it's finished on time and on budget. If it's not, then that number starts falling fast.
The nightmare scenario that's scaring investors away
But it gets worse. What's really freaking out investors is the possibility that they could sink all that money into a massive nuclear project that just doesn't work.
Their return under the 'contract for difference' is based entirely on getting that premium rate for their power of approaching £100 per megawatt hour, three times higher than the current wholesale market level. So what if it turns out a lemon?
Now no one expects that it won't work at all. But what if it keeps on tripping out with mysterious safety alerts generated by all the unbelievably complex software that's going to run the show? What if it's unable to pass its commissioning tests as a result? Or what if it's permanently on the blink and only able to run intermittently?
Then EDF will have turned £21 billion or £24 billion of good money into a massive decommissioning liability. This is the risk that is alarming Moody's, investors and EDF unions, not to mention the company's former finance director Thomas Piquemal who resigned in March this year fearing that Hinkley C could just finish EDF off.
And it could happen: at today's €11.33 share price, EDF is valued at €21.76 billion, or £17.1 billion - considerably less than even the lowest estimates of the Hinkley C project cost.
So what are EDF's options here? One is to abandon the project in the process writing off the £2 billion it has so far invested in the project, as Moody's, unions and equity investors hope. Another is to sell the site on to the Chinese General Nuclear Company (CGN) which is poised to take a 33.5% stake in the project in a deal announced last October.
But now even that last possiblity looks like it's off the cards - perhaps as a result of the British Queen's unguarded comment at a Buckingham Palace garden party last week that the Chinese delegation to London last October had been "very rude". And yes, that was the official visit on which CGN's investment in Hinkley C was wrapped up.
But whatever the reason, CGN has today stated that reports that China was planning to take over the Hinkley C site in the event that EDF backs out were "without foundation". A CGN spokesman said: "China General Nuclear Power Corporation has no plans to build nuclear reactors at Hinkley Point C. Our intention is to obtain regulatory approval to build our reactor design at Bradwell in Essex."
In other news, Germany's energy minister Sigmar Gabriel has just announced plans to invest €17 billion over five years in energy efficient technologies as part of an 'Effizienzoffensive' campaign aiming to halve the country's energy consumption by 2050. That's under a quarter of the UK's estimated cost of supporting Hinkley C. Could Gabriel possibly know something we don't?
But back to Hinkley C: how much longer can the tragicomedy go on before the it's finally booed off the stage? It really can't last much longer now.
Oliver Tickell is Contributing Editor at The Ecologist.
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