Critics suggest the deal between EDF and Areva announced in June could turn out to be a poisoned chalice. We ask whether the new joint venture will be able to overcome the challenges ahead.
In June 2015, the French government made a decisive announcement. The nuclear groups Areva and EDF, which are both predominantly state-owned, would be merged to create a new joint venture. The resulting entity, Areva NP, will be controlled by EDF, leapfrogging the state utility to the top of the European nuclear game.
Nuclear fission has long been critical to France’s power sector. One of the few nations in the world to use nuclear as its primary source of energy, the country generates 418,001.4 GWh of electricity from nuclear fission each year, comprising over three quarters of the total electricity mix. And while President Francis Hollande is in favour of a partial nuclear phaseout, hoping to downgrade to 50% of the total by 2025, France remains a poster child for any country looking to reduce its reliance on fossil fuels.
Over the last few years, however, the industry has faced significant difficulties. No new nuclear construction deals have been signed in France since 2007. What is more, since the accident at Fukushima in Japan in 2011, public faith in nuclear safety has been eroded, with activists staging thousands of anti-nuclear protests.
Counting the losses
Despite slumping global demand, Areva does have reactors under construction, including one in Finland and one in Normandy. Once they are launched, these next-gen European Pressurised Reactors (EPRs) will aim to improve safety while enhancing economic competitiveness.
Unfortunately, both reactors are far from ready, having been accused of design flaws and poor quality control. The Finnish EPR (begun in 2005, and scheduled for completion in 2009) is now running nine years behind schedule, and its original budget has doubled. The Normandy EPR (begun in 2007, and due for completion in 2012) is arguably even worse off – running six years behind schedule, its estimated cost has been ramped up from €3bn to €10.5bn.
Earlier this year, Areva reported it had lost €4.8bn in 2014. It went on to announce it would axe 6,000 jobs, or around 14% of its workforce, as part of a €1bn cost-cutting plan. As crisis talks got underway, EDF did not hide its desire for a takeover. But, given the extent to which Areva had struggled, critics suggested the deal might be a ‘poisoned chalice’.
Philippe Varin, chairman of Areva, remarked that any deal would need to be truly financially viable. “The project must ensure financial closure for the short term. And over the long haul, it must ensure the new Areva is a robust actor,” he told Reuters in May.
Terms of the deal
Following tense negotiations, EDF finally got what it wished for. The deal will effectively rip out Areva’s core reactor business, and hand over the reins to EDF, leaving a minority strategic stake for Areva. Aveva’s secondary function, as a nuclear fuel management company, will remain under its own control.
“This merger will allow for an ambitious export policy and the future renewal of France’s nuclear power plants,” said the government, which owns 84.5% of EDF and 87% of Areva.
A timetable for the takeover was set out in late July. While a firm offer will not come until October, both companies agreed in principle that EDF would pay €2bn for a 75% stake in Areva NP. Prior to this announcement, an unnamed source had told Le Figaro that the true figure may be closer to €2.7bn.
Whatever the final terms, it seems certain that more money will be needed. Areva NP has said it will need €7bn in capital in the next two years, meaning other sources will be required to make up the difference. While Aveva itself expects to secure €0.4bn from the sale of assets, alongside €1.2bn from equity financing, it is expected that at least €4bn will come from the public purse.
It is also thought the government will shield the new company from the risks associated with the EPR in Finland. As losses continue to heap up, and disputes rumble on, both Areva and EDF have said they are “completely immunised”, meaning the funds are likely to originate from the taxpayer.
Plan of action
Areva’s CEO Philippe Knoche said the agreement with EDF represented ‘very significant progress’. Citing his commitment to the downsized business – which would be transformed into ‘a competitive company refocused on its core business, the nuclear fuel cycle’ – he talked of the need to move beyond crisis management, and into a long-term plan.
“[The] next months will be key to continued success in the execution of this transformation plan, by keeping safety, the customer and social dialogue at the centre of our action,” he said on a statement. “One of the priorities will be to draw the organisation of two companies, different and linked by a strategic partnership at the same time.”
Areva NP’s new CEO and president was announced as Bernard Fontana, previously the CEO of Holcim Ltd. He joined the company on September 1st, stating in a release: “I am happy to join the group to lead Areva NP, a major French and international company known throughout the world for its expertise and its technologies. My objective is to work, with the support of employees, to write a new chapter in the company’s history.”
As the final pieces of the partnership fall into place, it is clear that the merged entity will have challenges on the horizon. Tasked not only with turning round the fortunes of the EPR plants under development, but also beginning the formidable task of replacing France’s existing fleet of reactors, Areva NP will need to work hard to make inroads in both the domestic and international markets.
That said, there are surely grounds for optimism. In May, the prime minister Manuel Valls told parliament: “I am convinced that the nuclear industry has a future, that it is a strength of our country.”
It might be argued that, in happier times, he wouldn’t have needed to make this claim at all. But with such major restructuring underway, many will be taking this claim at face value, and working to salvage this once celebrated sector.
This article appears in the October 2015 edition of Future Power Technology