New nuclear – nearly

Wednesday, June 5, 2013

As the FT reported on Friday, negotiations on the terms for new nuclear have advanced and there is increasing optimism that a deal can be done. The meeting between David Cameron and Francois Hollande in Paris two weeks ago amounted to a declaration of agreement in principle. Just three issues remain to be resolved.

On the Pont des Arts, the simple wooden bridge across the Seine, loving couples have taken to pledging their undying affection for one another by pinning to the railing small padlocks, inscribed with their names. Among the thousands in place there must now be one for Francois and Dave. The meeting on May 22nd was, by all accounts, very warm. Mr Cameron needs an ally willing to offer some concessions which he can present as a successful renegotiation of the UK’s membership of the EU. Mr Hollande needs every ally he can find in his attempts to isolate Germany to the point at which Mrs Merkel concedes and accepts the concept of Eurobonds – by whatever name.

The beneficiary of this new relationship is the nuclear ambitions of EDF in the UK. A deal is now materially closer. Just three issues remain unresolved. Can the project be financed? Can the terms survive full scrutiny and be judged fair to other suppliers? And can the project be delivered on time and on budget?

These are not small issues and many in Whitehall want to ensure that they are clearly resolved before an announcement in made. So far that caution is being overruled by the political will to do a deal. Mr Cameron wants a success.

Taking the three issues in turn. The simple fact is that EDF cannot finance the deal from its own already stretched balance sheet without jeopardising its overall credit rating. Henri Proglio, the chief executive has spent three years trying to improve EDF’s financial position and the wrong deal would wipe out the progress made. It is important to note that the EDF board has not yet approved the deal. Optimism on this point comes from the fact that the French government effectively controls the network of companies led by Areva which will supply key equipment to EDF if Hinkley goes ahead. President Hollande can insist that the companies take part of the cost and the risk on their own balance sheets. If that happens, the EDF board can accept a deal which if all goes well will earn a 10 per cent return.

That is reasonable given the scale of the investment (now up to £15bn) and the timescale involved. The question of whether EDF is being over-protected will come down to the detailed terms of the agreement. The strike price gets the headlines but the real issue is the distribution of risk – who pays if costs overrun or if there are radical changes in the market which leave nuclear unneeded. Those terms will inspected forensically by other suppliers and by bodies such as the Public Accounts Committee – a degree of scrutiny to which EDF is not always accustomed in France. I would not be surprised to see the government forcing a last minute concession on the strike price – down to £80 per MwH – to convince the sceptics that they have negotiated a tough deal.

The third point is the one on which, contrary to the conventional wisdom, I think there is the greatest cause for optimism. EDF in the UK knows that the construction of Hinkley will be a global test of its ability to build new nuclear on time and on budget. EDF’s UK team is strong, clearly much stronger than the people responsible for the outrageous cost overruns at Flamanville – EDF’s embarrassingly expensive construction project in France. To be over budget again, after all the learning from Flamanville, would destroy EDF’s reputation in a very competitive global market. It is also well understood that a failed project would also mark the end of any programme of new nuclear in the UK. No pressure as they say. But sometimes pressure works.

Overall then the deal is nearly done. Nearly.

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