Tue. Jan 18th, 2022


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By Francois de Beaupuy

(Bloomberg) —

High energy prices are bearing down on Europe’s economy like a freight train, and France just pushed its largest electricity producer into the path of the collision.

The government will force Electricite de France SA to sell more power at a steep discount, costing the utility almost $9 billion. The move will protect households and small businesses from surging energy prices, boosting both the economy and the political fortunes of President Emmanuel Macron — at the risk of breaking the backbone of the country’s energy policy. 

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It’s not surprising that France should lean on EDF in a time of dire need — the company has been the nation’s key power supplier for decades. Its fleet of reactors has delivered enough cheap and clean electricity to meet domestic needs, while also exporting to neighboring countries. 

The French government decided that it “must protect consumers, and that will done at the expense of EDF,” said Xavier Regnard, an analyst at Bryan, Garnier & Co. 

Yet the extra burden is being imposed when EDF has never been weaker. It is struggling with costly maintenance problems that have kept its aging plants offline — one of the reasons power prices have risen so high in recent months. It must also partly bankroll the expensive new reactors and renewables that will help France maintain a reliable and low-carbon energy supply in the decades to come. 

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Analysts warned that the company is barely strong enough to take the financial blow from the new government mandate. Minority investors rushed for the exits, sending shares down as much as 25% on Friday.

Before Thursday’s announcement by Finance Minister Bruno Le Maire in an interview with Le Parisien newspaper, the government had been seeking ways to bolster EDF’s finances. It had been trying, and so far failing, to convince European Union competition authorities to allow an increase in the regulated prices at which the utility sold wholesale power to its rivals. 

The extra funds would have helped the company make the investments in nuclear, wind and solar that are essential if the France is to meet its commitments under the Paris climate agreement. Now the utility faces an estimated 7.7 billion-euro ($8.8 billion) hole in its earnings. 

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“This political intervention is certainly diametrically opposite to the government’s medium-term goals of steering the company to calmer waters with a strong balance sheet for green investments and creating a positive story around nuclear ahead of decisions to build new reactors,” Meike Becker, an analyst at Sanford C. Bernstein & Co. wrote in a note.

EDF said Thursday it can’t know how bad the financial hit will be at this stage. Because the company sells most of its electricity in advance, it will have to buy back power on the market in coming months at a higher price. The shortfall will be exacerbated by the fact that several of its nuclear power plants will be offline longer than usual for repairs. 

The company said on Thursday that it “will consider appropriate measures to strengthen its balance sheet structure and any measure to protect its interests.” EDF sold 4 billion euros of new shares in 2017 to shore up its finances when power prices collapsed. Most of that money came from the French state, which currently owns 84% of the utility’s shares, but minority investors also contributed. 

The utility is likely to need to raise extra capital again, JPMorgan Chase & Co. analyst Vincent Ayral wrote in a note. Investors should avoid the stock for the time being, he said. 

With gas and power prices expected to remain high for some time, and Macron facing voters in April, there’s little sign respite for the French utility. 

“For EDF’s minority shareholders, there’s always a political risk to be squeezed, even more when elections approach,” said Regnard.  

©2022 Bloomberg L.P.

Bloomberg.com

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