Spot the CFO. (Thomas Piqemal and Jean-Bernard Lévy of EDF).
This article is an extended version of my latest column for Recharge:
The speed with which the renewables industries will be able to grow in the years ahead will be much affected by the course of the gas and nuclear industries’ efforts to grow. Having considered gas in my last column, let me turn to nuclear, and focus on a project that will have much to do with nuclear’s prospects globally: EDF’s Hinkley Point C plant.
I start with a set of numbers surely destined to become a classic case history for business schools. Imagine you are the CFO of a company that has a market capitalisation of €18 billion. You are being asked to find investment of €22 billion for a new nuclear plant, the first of a whole new fleet. Without that fleet your company cannot hope to grow, assuming it sticks with nuclear generation, and therefore without that one plant its business model will be exposed as broken. Yet your plant is the most expensive power station in the world, and one of the most expensive human construction projects ever, in real terms. And here is the thing: you carry €37 billion of net debt on your balance sheet.
You have two further problems. The first is €55 billion in estimated liabilities to keep a fleet of aging reactors, of earlier generations, open beyond their long-scheduled closedown dates. The second is an unknown number of further billions to fix a grave safety flaw in the steel of a pressure vessel in the forerunner of the new plant you must build.
What do you do?
You resign, of course.
Which is exactly what EDF CFO Thomas Piqemal did on 8th March.
Now imagine you are the abandoned CEO. You face a few problems beyond the loss of your CFO, the market signal that sends, and the reasons for his departure. Moody’s, the ratings agency, has warned that your credit rating will be downgraded if you go ahead with the plant, making it far more difficult for you raise yet more debt. Your labour unions are begging you not to go ahead, and threatening to strike if you do. They are openly saying that they fear this single project will bankrupt the company. Worse, they have seats on the board, because the workforce are part owners of the company.
What do you do?
In a rational world, you resign too.
But now imagine you have a rock solid belief system. You cannot conceive of a world without nuclear power, or at least your vital power plant. So instead of resigning you elect to announce your renewed determination to build the project.
You confer with your bosses in the French government, which owns the majority of the company. They in turn confer with your end client, the British government, and your minority co-investors, the Chinese government. All are populated with people who share your belief system, so they too restate their commitment that this project will go ahead.
The British say they absolutely need the 7% of national electricity that the project would provide, by 2025, scheduled start date. That is why they have long since agreed an unprecedented deal with you that will pay £92.50 per Megawatt hour, more than twice the current retail price of electricity, guaranteed for 35 years, and linked to inflation – in so doing loading many billions onto the future energy bills of hard-pressed British families. British officials are meanwhile actively suppressing renewable energy and energy efficiency. Cynics suspect they are doing so in part to ensure a market for the electricity your plant will provide, when you finish it – as you say you can, nothwithstanding doubters even in your own ranks – ten years from now.
Yet still your catalogue of problems grows.
French authorities open an investigation into faking of records at a manufacturing plant fabricating vital parts for your power plant. They have identified anomalies in documents related to 400 nuclear components made for existing nuclear plants running today.
At the United Nations, a committee rules that the UK government is in breach of international obligations in failing to consult with neighbouring countries over the potential environmental impacts of your intended plant.
Then you realise you have left contingency out of the budget. You are forced to add another €3 billion plus and to the already record-breaking bill.
The day after that, Moody’s carries out its threat to downgrade your credit rating. Standard and Poor’s joins them, going further, cutting a significant part of your debt to junk status.
And so it goes on.
Does it not increasingly seem that life has a tendency to be stranger than art? I am not sure an author could have successfully imagined the course of the Hinkley Point fiasco thus far.
As for the denouement, the only thing yet to be resolved is the the exact shape of the inevitable tragedy.
Including the extent to which this white-elephant product of a broken and dying belief system in society can slow down the growth of renewables.