Utility Week

UTILITY Week 22nd January 2016

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20 | 22nD - 28Th January 2016 | uTILITy WeeK Finance & Investment Analysis I t's been years in the making. Aer count- less false starts, EDF is expected to reach its final investment decision on Hinkley Point C on 27 January. Little did the French energy giant know that the nuclear project, so many years in the planning, would have its fate decided against the backdrop of a global economy that is once again in turmoil. Just when it seemed the economy was on the up, bearish analysts are predicting another crash, with the Chinese devalua- tion of the Renminbi – and subsequent price plunges on the stock market – seen as por- tents of doom. The value of assets around the globe is being written down as a new realism sinks in. Global mining company BHP Billiton, for example, saw more than 30 per cent, or £5 billion, wiped off the value of its US oil and gas assets last week. This tur- moil could be a significant blow for the £24.5 billion megaproject at Hinkley, especially as much of the money is coming from EDF's Chinese investment part- ner, CGN. On 27 January, EDF's board is meeting to decide whether to proceed with the construction of the world's most expensive power station. It has been a dif- ficult path to this point, and one that has become increasingly tough in recent months. Oil prices have plunged over the past 18 months from more than $100 per barrel to less than £30, and this has had a knock-on effect on wholesale energy prices. This has hit EDF's profitability and cash flow just at the time when it is seeking to raise capital to fund the development. As part of this fundraising effort, the largely state-owned company sought to sell a 49 per cent stake in the Hinkley Point C pro- ject. However, it was only able to offload a 33.5 per cent stake, to China General Nuclear Power Group (CGN), agreed as part of a wider new nuclear deal in October last year. EDF has also been looking to sell other assets to raise cash. The company is thought to be considering a £6 billion partial sale of its eight UK nuclear reactors to help fund its £18 billion investment in Hinkley. This would leave EDF heavily reliant on the suc- cess of the Hinkley project – not to mention the UK subsidy regime. The financial woes go further than EDF's current balance sheet, as investors remain to be convinced about the third generation of the European pressurised reactor (EPR), despite the unprecedented 35-year £92.50/MWh contract for difference (CfD) agreed between EDF and the UK government. Ada Li, Moody's vice president and senior analyst of corporate finance, Hong Kong, says: "I have concerns over the third generation technology for Hinkley Point C, which remains untested and has experienced prolonged delays and cost overruns elsewhere." Moody's vice president and senior ana- lyst Paul Marty tells Utility Week there are a "lot of questions" around the EPR technol- ogy, amplified by the delays and cost over- runs at Flamanville in France and Olkiluoto in Finland. "That has been the main driver behind the difficulty of EDF to find investors in the project, as opposed to global trends," he adds. These projects have seen delays of six years and nine years, with the budgets roughly trebling in each case. Meanwhile, the financial backdrop against which EDF has to make its decision is increasingly stark. The Shanghai Composite index has seen share prices plummet by 12 per cent since the start of the year – despite a circuit breaker mechanism designed to pre- vent sudden crashes. There are fears are that a plunging stock market in Shanghai will lead to the Renminbi being devalued to boost exports, causing commodity prices to plummet even further and leading to a wave of global deflation. Societe Generale global strategist Albert Edwards outlines what impact this would have. "It means global deflation and reces- sion," he said in an analyst note. Yet there is a certain inevitability about Hinkley. Despite the huge financial com- mitment required from EDF and the shaky global outlook, analysts view the Hinkley Point C deal with confidence. Jefferies utilities analyst Peter Atherton says: "The Chinese economy is clearly slow- ing down, but they have built up some very big corporations which have got a lot of money and they want to spend that money." State-owned CGN is one of these "big cor- porations" , and the deal with EDF paves the way for the Chinese nuclear firm to develop a second new nuclear plant at Sizewell and a nuclear plant of its own design in Essex in which it will take a two-thirds stake. The political will behind the project, both in France and China, is also powerful, according to Moody's Ada Li. She says it is a "high profile project which has the blessing of both senior UK and China Will deflation sink Hinkley? EDF must make its final investment decision on Hinkley Point C just as the world's economy flirts with deflation and an unwinding of global asset prices. Mathew Beech reports. key inDicators In 2016: the S&P 500 6.4% the FTSE 100 4.8% the FTSE Eurofirst 300 7.7% the Shanghai Composite 12% shanGhai stock exchanGe composite inDex 3,800 3,600 3,400 3,200 3,000 2,800 Nov 2015 Oct 2015 Jan 2016

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