Thursday 23 April 2020

Nuclear ain't free, either: EDF in Big Trouble

One of our recent visitors queried my offhand comment that EDF was in Big Trouble (BTL on the "Negative Prices" piece).

Easy:  EDF is essentially a price-taker, but its costs are by no means all sunk - see CU's piece on oil price and comments thereupon.  OK, EDF has some short-term hedges in place (forward sales at fixed prices, in their case) but the very large bulk of its very long future outlook is naked exposure to the market price of power, which ain't gonna be healthy.  (EDF's outlook has to be long - the longest of any European energy producer - because it amortises its stuff over many decades at a very low discount rate.  Only holders of pure, essential infrastructure like National Grid could contemplate longer outlooks and lower discounts.)

The traditional model of most power generators in competitive markets is built not on absolute prices (naked exposure), but spreads - the differences between e.g. electricity and coal prices ("dark spread") or electricity and gas ("spark spread").  They are margin businesses: buy fuel, sell electricity - when profitable.  (Large-scale hydro power is much more complex, economically, but need not detain us here.)  Market prices will be set by something approximating the marginal plant on the system at a given point in time.

Then along come wind and solar, with their sunk costs and near-Zero short-run marginal cost - no fuel!  They would be price-takers, too, were it not for the massive subsidies they traditionally received.  Increasingly, however, they do trash the market price for everyone else (see "negative prices" as before) - that's zero-marginal-cost-plus-sunk-capital-cost for you.  

Here's the thing.  For some purposes - specifically, political and PR purposes - nukes have enjoyed billing themselves as having "zero marginal cost", too.  "Electricity too cheap to meter" in the words of the old slogan.  But it's bollocks.  They have monstrous ongoing costs to cover, of which the cost of fuel is broadly irrelevant.  It's maintenance, safety, plant life-extension and, crucially, decommissioning that loom large in their low-discount future perspectives.  And for EDF these things are (a) vast, and - the most important point - (b) not even remotely fully funded.  If they were fully funded they could be viewed as sunk.  But they ain't - not even close.

So ultra-low electricity prices are catastrophic for EDF and, in turn, for the French state.  Yes folks, EDF is Too Big To Fail. The French are obliged to essay the biggest can-kicking exercise in Europe.  Longtime readers of this blog will know that shortly after we started up I opined (in 2007) that French policy was all about getting other people (the EU, the UK ...) to pay for EDF's astronomic decommissioning bill.  Everything that's happened since has reinforced the point. 

That very much includes the suicidal madness that is Hinkley Point C, one of the primary reasons Osborne, and May in her turn, deserve eternal opprobrium.  The scale of UK subvention that we've committed to over 35 years, to buy the output of this plant at truly ludicrous prices will put a serious dent in our economy.  Ultimately, May is excused through weakness of intellect and will. 

But Osborne?  Osborne seemed to believe in an ever increasing electricity market price (the only conceivable rationale for HPC).  He is a cretin, and how he managed to come by a reputation for political genius is one of those enduring mysteries.

What's to be done?  Well for one thing, don't let's repeat the entire disaster by paying EDF to build Sizewell C! (which was firmly in the pre-covid political calendar, hopefully now on ice).  And for HPC?  We mave have to resort to the Semtex option ...



Don Cox said...

Certainly Hinckley Point C is very costly.

But what else are we to use for generating electricity when the wind doesn't blow and the Sun doesn't shine ?

Will oxidising any kind of fuel -- coal, gas, oil or wood -- be allowed in ten years' time ? Nuclear may be expensive, but it's extremely reliable.

Don Cox

david morris said...

Osborne & May get (quite rightly) named & shamed in respect of Hinkley.

But Davey gets a free pass ?

Nick Drew said...

Davey is a dickhead alright, but HPC was Osborne's

Davey & Huhne were responsible for Drax / large-scale biomass - just as bad in some ways as HPC, though not remotely as expensive

saying "wood-pellet burning for electricity is carbon neutral" is the same sort of eyes-closed, hands-over-ears, patently fallacious incantation of doctrinaire nonsense as "trans women are women"

rwendland said...

And you didn't even have to mention EDF's short term problems ND! Power demand in France is below 80% of pre-Covid, and EDF have had to withdraw financial targets for 2020 and 2021. With 75% of French power production nuclear EDF will have to shut down some reactors for the summer. Shares down 27% since the start of the year.

rwendland said...

Don, wouldn't try saying "Nuclear ... it's extremely reliable" to anyone in Japan! 9 years after Fukushima they have about 9 of the 60 nuclear reactors they had running.

Back-of-envelope that about 11% of operating reactors worldwide not running 9 years after an accident. Reliable?

Raedwald said...

Has my memory short circuited or did EDF once own Thames Water?

I can remember at one time in London I was almost wholly French - I'd wake in the morning to make French coffee bought in a Calais hypermarket with French tap water boiled with French electricity before smoking a Gauloises and catching a French (Connex) train to work, dumping my Metro in a bin emptied by (French) Veolia. After work I'd generally drink French wine in the French House served by a French barmaid. Everyday life was almost like being on holiday.

Nick Drew said...

No, that was RWE

(who have deep problems of their own ...)

Raedwald said...

Ah now I remember - wasn't Générale des Eaux also involved with Thames water at one stage?

Raedwald said...

No sorry as you were - they owned the trains.

Don Cox said...

There was absolutely no need for the Japanese to shut down all those reactors. But they are understandably jumpy because of their history of being the victims of nuclear weapons.

So far as I know, nobody in Japan was seriously injured by radiation from Fukushima. I think one of the first responders got a small burn on his ankle from a leaky boot.

The deaths were caused by the evacuation of care homes.

Chernobyl is the only nuclear power station accident with any number of deaths, and that plant was built in the old USSR with a complete disregard for safety. Nothing like that is in use today.

E-K said...

I was impressed with Fukushima. I want one here, in my town.

Hit by an earthquake AND a tsunami. The very worst case scenario imaginable - all the worst bits of of the Bible in one day. And the wee little thing did alright.

It wasn't an 'accident'. It was the worst nature could throw at it.

God smote the land with his mighty fist and man did rise up with singed hair on ankle.

Time for a New New Testament.

rwendland said...

E-K you are right an earthquake AND a tsunami was pretty tough times.

But the nuclear engineers had told us earlier, with highly complex and expensive Probabilistic Safety Analysis, that was the kind of thing the Fukushima reactors could survive easily. Or at least roughly speaking only fail badly about once in a 100,000 times (or years - not sure).

I live downwind of Hinkley Point, though probably just beyond any realistic accident exclusion zone. I'm not reassured by Fukushima. I notice Cardiff, Newport and central Bristol are generally downwind and within 50 km. Extremely unlikely though massive country-breaking cost if realised, but still an externalised public risk (aka ignored) in the economic justification.

Given that new nuclear costs are so horrific if financed privately, I can see no justification for building more with the current technology we have, especially in quite densely populated UK. (Though I do expect us eventually to have an economic and safe enough nuclear technology - just that the current technology does not cut the mustard.)

If you want to see some reasonable cost comparisons of generation technologies using private finance in the US, the recent Lazard analysis is a reasonable place to start, though pre-recent demand and oil price collapse:

CityUnslicker said...

ND your writing style when a bit angry about something is wonderfully attractive.

CityUnslicker said...

A few more typo's and it would be perfect.

Anonymous said...

@ We mave have to resort to the Semtex option

How does that sit with force majeure, ND

Timbo614 said...

@CU > A few more typo's and it would be perfect.
First LOL today and he forgets to put in italicised French words whilst being liberal the the word French. :)

Nick Drew said...

perhaps I should get angry more often

but as you know I am such a mild mannered and broadminded chap

DJK said...

Nothing to add but thanks for a very informative post. Nowhere else have I learned so much about the electricity market.

Elby the Beserk said...

We're at this very moment installing a MOTA in our back garden. Energy experts such as Nick will recognise this as a "Massive Oil Tank Array" which we will fill whilst prices are rock - oil? - bottom.

I **do** recall that artricle from way back, Nick. Tip of the hat.

rwendland said...

ND, isn't that part of EDF's problem that is unfunded decommissioning costs best tackled, or at least nicely put-off, by whole heartedly embracing the "PWR's can be life extended to 80 years (or more)" movement in the US?

I've read just a little of the R&D the US has been doing on this for over 10 years, and have to admit it doesn't seem implausible for conservatively designed, well-built PWRs - generally the late 70s and 80s PWR with power of about 900MW, ie those before they tried pushing the power up over 1GW and hit various problems.

France has 32 of these ~950MW reactors, their older ones excluding the Fessenheim early closures. They could nicely push these down the accounting road by about 40 years, and 90% of them might well last that long. Wouldn't that be part of the solution? As you point out, this involves very large life-extension and extra ongoing monitoring costs, so isn't economic nirvana, but is probably slightly profitable or there-about for a decade or two. And on the discount rate spreadsheet massive decommissioning costs 40 years forward look easily affordable, if not insignificant, today.

Of course for EDF the downside is it would pretty well kill off the French new nuclear business, which they got as the forced government gift of Areva, as that depends on replacing French PWRs ASAP. HPC & Sizewell C is just life-support and build practice for French new nuclear until they hope they can start replacing French reactors in volume.

But savvy EDF people must know the EPR is dead as an export product, and that the French new nuclear business is in reality already toast on the conveyor belt, and from a financial perspective is best killed off soon. It all depends, it seems to me, if the economically rational EDF people can overcome the internal EDF and government nuclear engineering lobby that doesn't want to give up the flag-carrying and exciting new nuclear. But the life-extension work would be large, and soften the unemployment blow quite well. Seems a bit of an option to me.

A couple of decent intro articles on 80 year life extension are:

Nick Drew said...

Extension (or "pretend to extend") is a great financial tool, for sure. Such is the strategic, long-game nature of the issue, EDF is likely to be quietly *promoting* all manner of studies to prove how technically viable it is

I have never worked in the nuke industry (though I've consulted for it) but I fondly remember the complex economics of prolonging the lives of offshore oil & gas platforms. It's an entire art form!