Construction continues at pace at the construction site of the Hinkley Point C nuclear power station being built near Bridgwater in Somerset, England.
(Photo by Matt Cardy/Getty Images)
Getty Images
As midday in Paris approached and equity trading on the French exchange, the CAC 40 reached its halfway point shares in Électricité de France SA (EDF) had fallen 6.35% to 10.03.
This was the lowest price in the past rolling 12-months and over the past year shares in EDF have tumbled 27.61% cf. the underlying benchmark CAC 40’s gain of 1.47%.
The reason for this dramatic decline today is EDF issued a warning on Wednesday morning that its Hinkley Point C nuclear plant in Somerset, U.K. may see construction costs dramatically increase by £2.9 billion ($3.6 billion) more than was previously estimated as it blamed “…challenging ground conditions…”.
Rising costs come hot on the heels of delays amid investigations into welding and steel used in its reactors. An even longer delay can be found at a plant being built in Finland.
What has driven the share price lower with such speed is that fact that the firms constructing the new plant, not taxpayers and customers, pay the bill for the increase in costs. That means EDF and its partner on the project China General Nuclear Power Corp (CGN).
Making that money back in a sector that has become increasingly more regulated in terms of price caps is going to prove difficult. The competition between alternative sources of clean energy is stacked against EDF as prices for new wind power delivered by 2025 were set last week at £40 ($50) per megawatt hour. By comparison, power from Hinkley Point C is expected to cost £92.50 ($115) per megawatt hour.
There still a high expectation that Unit 1 of Hinkley Point C will begin generating power from the end of 2025 and the 3,200-megawatt plant is expected to provide around 7% of Britain’s power needs, or enough for 6 million homes.
Stuart Crooks, Managing Director of Hinkley Point C, wrote in a letter to staff.
“…Our earthworks are complete, but challenging ground conditions meant we overspent to finish them on time…”
Large energy suppliers are complex businesses. They generate electricity and buy gas to supply energy to homes and businesses. In addition, they often trade power between different parts of their businesses at home and overseas.
The UK gas network was privatised in 1986 and the electricity network followed suit soon after in 1990, allowing households to choose suppliers. This allowed foreign providers to enter the market directly or by snapping up domestic operators.
EDF Energy is a subsidiary of the French Government-owned energy company EDF. Over recent years it has acquired U.K. energy companies London Electricity, SWEB, Seeboard and British Energy.
Current regulation requires the large energy suppliers within the U.K. to produce an annual Consolidated Segmental Statements (CSS) to show the costs, revenues and profits for the different segments of their generation and supply businesses.
Large suppliers to have their CSS independently audited to allow consumers a sense of confidence that information on reported profits is accurate and robust. The large suppliers must publish their CSS no later than four months after the end of their financial year.
In 2014, the Competition and Markets Authority (CMA) launched a full investigation of the energy market. On June 24, 2016 the CMA issued its final report. It has made several recommendations relating to financial reporting requirements including a requirement for the energy companies to provide information on their balance sheets.
With tighter regulation of building standards and maintenance procedures the profits earned in the U.K. from energy generation have fallen in each of the past eight years. In 2011 the profits across the industry from energy generation were £2.4 Billion ($3.0 billion) to just £751 million ($931 million) in 2018.
It has clearly dawned on the equity market that EDF may be in for a testing period as the energy price cap is expected to run until 2020, when Ofgem will make recommendations as to whether a cap should continue after that.
The heavy scrutiny of standard variable tariffs has been one of the issues to plague the Big Six. However, it has less impact on smaller suppliers as they hold the most amount of these tariffs on their books.
The “Big Six” held 99% of the domestic supply market in the final quarter of 2012; that has fallen to 80% as of 2018. Over 60 rival suppliers have emerged and collectively, these small suppliers have exploited their cheaper pricing ability to capture a large chunk of market share from their larger rivals.
It may be a cold winter for EDF amid rising costs and falling profits.
