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 ...