French energy group EDF has postponed giving final approval for construction of the twin 1600 MW Areva EPRs in Somerset, UK. The current cost estimate, which is a work in progress, is pegged at between $18-20 billion.

The move to delay the final investment decision is said to have been made as a result of concerns within the French government and by investors about whether the financing was firmly in place for the huge project and whether costs could be contained over a decade long period of construction of the reactors.

Call it a case of cold feet, or maybe a just a realization that the huge project, which is essentially pledging the fortunes and sacred honor of the entire French government, is going to take a lot of cash and attention over the next decade, That’s what’s needed if it is to avoid becoming another financial black hole like the EPR project in Finland.

Although the Finnish project is beset by the to be expected first-of-a-kind problems, costly disputes with the Finnish nuclear regulatory authority and with Siemens, Areva’s partner on the project, are in arbitration and may take several years to sort out.

Hinkley Investor Profile

EDF is slated to post about two-thirds of the Hinkley cost. A consortium of two Chinese state-owned nuclear firms have pledged to take a 34% equity stake in the project.

Both EDF and Areva are more than 80% owned by the French government.(See chart below).

What adds uncertainty to the decision to proceed with the Hinkley Point project is that EDF is in the middle of a process to “acquire” Areva’s reactor division though the transaction will be, for the most part, a notation in the French national budget tables.

For EDF’s part, it wants to low ball the transaction at about $2.7 billion while simultaneously asking the French government to put up its equity stake in the Hinkley Project. It is not clear EDF can carry the load of the its planned equity stake in the Hinkley project on its own. It may sell some UK assets to raise the needed capital.

What concerns financial analysts is that the decision to postponed the final investment action comes very late in the process. Planning for it began in 2010.

It isn’t like the costs should be a surprise to anyone. What the situation appears to signal is that there is not a consensus within the French government about the project. This is not something that can be finessed. It’s a case of all in or nothing.

French Labor Unions Sound Off

Even a French labor union, who nominally would benefit from the huge upswing in business with French supply chain firms providing components for the plants, is nervous about the project.

The CFE-CGC Union, which has a seat on EDF’s board, said in media statements that EDF and Areva could both be put at risk if there are significant cost overruns or delays which would result in stiff financial penalties. The CFE-CGC Union represents lower level management and salaried employees at EDF.

Areva is already in the hole with cost overruns and delays on an EPR project in Finland. It is 10 years behind schedule and more than $5 billion over budget.

The union cited a recent action by the Treasury Department of the UK government which assigned a below investment grade rating to to the Hinkley project.

The UK government is understandably nervous about EDF’s case of cold feet for more than just financial reasons. It recently announced it would close all of its coal fired plants by 2025 betting the ranch on 17 GW of new nuclear of which the Hinkley Point project is first in line.

In contrast Jean Bernard Levy, EDF’s CEO, told the Financial Times London on 1/26/16 that the firm will invest a total of about $16 billion for a two-thirds equity stake. To raise this money EDF may sell its interests in eight other UK nuclear plants .

He expressed confidence that the completion of the Flamanville EPR, which is also over budget and behind schedule, will turn out to be an “exceptional” nuclear project and that it will bring more investors to the table for the Hinkley Point project.

The Flamanville project was supposed to cost $3 billion with a start of operations set for 2012. It will now be completed in 2018 at a cost of about $11 billion.

The French unions said that the estimate to build the twin EPRs at the Hinkely site in nine years may be open to question. EDF declined to comment on media reports about the concerns raised by the union.

French government must decide how to move ahead

French President Francois Hollande has convened meetings of the ministers responsible for EDF and Areva to try to sort out whether the government will go all in on the Hinkley project. Failure to resolve the investment crisis would have major international implication for France’s relationships with the UK and with China.

France, which gets about 75% of its electricity from nuclear power, has long considered nuclear engineering expertise to be a national security asset.  Failure to rescue the Hinkley project is not an option despite Hollande’s opportunistic political dances with the French Green Party. The EDF board is expected to reconvene to try again to make an investment decision in the Hinkley project in mid-February.

EDF and Areva are also slated to build a second set twin EPR facility at the Sizewell site in Suffolk in the UK and are completing two EPRs in China. No date has been set for the start of work on the Sizewell site.

Recent efforts to move ahead with two of a planned six EPRs at Jaitapur in India remain bogged down over concerns about India’s nuclear supplier liability law, costs, land transfers, and the recent expiration of the environmental permit for the site. A visit earlier this month by French President Hollande to meet with Indian PM Modi punted the completion of negotiations over the project into the future.

Areva to sell $5 billion in bonds

While EDF and Areva has set the value of the transfer of the reactor division to EDF for $2.7 billion, the troubled firm needs another $5.5 billion in new capital to meet its global commitments.  To do this Areva is planning to sell bondsto institutional investors.

The company said that the capital increase is designed to “restore the firm’s balance sheet situation.”

The French government is expected to back the bonds. Both financial transactions would be completed by the end of 2016.

Investors are reported to have welcomed Area’s plans to sell the bonds. The value of some of its current bonds increased based on the announcement according to a Bloomberg wire service report for 1/27/16.

Update 2/1/16- Hitachi CEO airs concerns about Hinkley project

The Telegraph, UK, reports that the head of Hitachi has warned that the financial turmoil surrounding the construction of Hinkley Point nuclear plant creates “very serious concerns” about its own investment in the UK.

Hiroaki Nakanishi, chairman and chief executive of the Japanese industrial giant, said the delays experienced by Hinkley’s developer EDF raised questions about how future plants including its Wylfa Newydd project are funded.

Hitachi’s subsidiary Horizon is planning to build a nuclear plant on Anglesey that is expected to start generating power by the mid-2020s.

In an interview with The Telegraph, Mr Nakanishi revealed that he had expressed concerns about the expected costs of the project with Philip Hammond during the Foreign Secretary’s visit to Japan this month.

Horizon is in talks with the Government to ensure the Wylfa deal presents value for money for both sides.

# # #