A Brexit negotiating ploy against France?
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The UK government’s decision to postpone the signing of a controversial, tripartite $24-billion nuclear energy deal with state-owned companies from China and France could end up having serious ramifications not only for Britain’s relations with the world’s second largest economy, but also for the financial health of one of France’s biggest corporations.
In an opinion piece in today’s Financial Times, China’s ambassador to the UK, Liu Xiaoming, said the Hinkley Point deal represents a “crucial historical junction” for relations between the U.K. and China, which has a one-third stake in the nuclear power station that was scheduled to be built by France’s majority state-owned energy giant EDF.
“Right now, the China-UK relationship is at a crucial historical juncture,” wrote Liu. “Mutual trust should be treasured even more. I hope the UK will keep its door open to China and that the British government will continue to support Hinkley Point – and come to a decision as soon as possible so that the project can proceed smoothly.”
For the UK, forging closer trade relations with the world’s second largest economy should be a no-brainer. After Brexit, it has little choice but to court trading partners beyond Europe’s shores. In the last five years, China has invested more in the U.K. than in Germany, France and Italy combined. President Xi Jinping said that they were in a “golden era” of bilateral relations during his visit last year, which secured deals valued at over $50 billion. But now, that could all be on the line.
On the surface, there are three obvious reasons for UK Prime Minister Theresa May’s reticence to approve the Hinkley project:
The government fears that if the project went ahead, it would grant the Chinese state-owned company China General Nuclear undue influence over sensitive infrastructure. In a blog post written last year before becoming May’s chief of staff, Nick Timothy warned that involvement by Chinese partners in the project could allow them to “shut down Britain’s energy production at will.”
Then there’s the sheer cost of the project: the former UK government had guaranteed a price of £92.50 per megawatt hour of electricity — more than twice the current market cost — for 35 years. That’s reason enough for the “white elephant” project to be scrapped, says The Economist:
Regardless of security worries about China, which are probably overblown, the Hinkley plan looks extraordinarily bad value for money. What’s more, as renewable sources of energy become more attractive, the days of big, “baseload” projects like Hinkley are numbered. Britain should pull out of the deal, and other countries should learn from its misadventure.
There could also be a fourth, largely ignored motive behind the UK government’s delaying tactics: to use it as leverage in any future Brexit negotiations.
Since the British public voted on June 23 to leave the EU, Hollande’s government has been one of the fiercest critics of a future Brexit. Paris has also openly expressed its pipe dream to supplant the City of London as Europe’s financial capital. It’s even offered massive tax breaks to lure the same financial firms and hedge funds that Hollande once described as his nameless, faceless foe.
It’s not just the government taking a hard line against a proposed UK withdrawal from the EU: the French public recently topped an Ispos Mori survey after 39% of Gallic respondents said the EU should turn the screw on the UK after the nation’s decision to sever ties with Brussels.
But the UK appears to have an ace up its sleeve: namely, the €37 billion of debt hanging over the firm that’s meant to lead the Hinkley project, France’s state-backed utility EDF. It also has €10 billion of “hybrid” debt — bonds with equity-like qualities — to its name. According to the Financial Times, the firm’s finances are so strained that its former finance director, Thomas Piquemal, warned EDF’s CEO, Jean-Bernard Lévy, that Hinkley Point must be delayed in order to “avert financial disaster.”
Lévy chose to ignore Piquemal’s warnings, since he was under strict instructions from the French state to proceed with the deal. Piquemal handed in his resignation in March, and on July 29, the project was passed by EDF’s board, by 10 votes to seven, just hours before the British government announced its decision to delay its approval.
But internal opposition to the project remains fierce. Already one French state-owned nuclear group, Areva has collapsed this year under the weight of its own debt, prompting some at EDF to question the wisdom of embarking on yet another hugely complex, capital-intensive project, particularly at a time of growing financial duress.
“Areva shocked us all,” says a rebel within EDF. “It sharpened our thinking about Hinkley, made us understand the same could one day happen to us.”
Areva was brought down by the losses it incurred on a project in Finland that used the exact same EPR reactor system that is planned for Hinkley Point. The project is nine years behind schedule and €5.2 billion over budget. As for Areva, it is now being broken up as part of a government-backed bailout, with parts of the business sold off to EDF and other companies.
Hinkley is forecast to set EDF back €15 billion of capital expenditure. That’s on top of the €95 billion the company is expected to splash out on other projects over the next decade, including a €55 billion initiative to refurbish France’s nuclear fleet. While corporate debt in Europe may be cheaper than at any point in history, thanks to Mario Draghi’s determined efforts to hoover up all corporate bonds that aren’t yet unadulterated junk, including those of 85% state-owned EDF, there are limits.
The rating agencies have already cautioned that taking on another expensive project will put a big strain on EDF’s finances. “If they go ahead with Hinkley Point, we will certainly downgrade them,” said Pierre Georges, credit analyst at Standard & Poor’s. “The project risk is large, and the record for construction of EPRs is so far poor and it will be a drain on cash flow for at least 10 years.” Downgrades could plunge EDF’s “hybrid” debt below investment grade, making the €10 billion it currently holds “more expensive and possibly difficult to refinance,”said Mr Georges.
For France, there is a whole lot more at stake in the Hinkley project than €15 billion in expected capital expenditure. If Hinkley Point doesn’t happen, it would be a major — perhaps even mortal — setback for the EPR technology that is seen as crucial to France’s future in the sector, which accounts for 220,000 jobs, more than the car industry. In fact, so important is the Hinkley Point decision that it could even “jeopardize the solidity and survival of the national energy company,” France’s Socialist Party warned today.
And that is precisely why delaying a decision on Hinkley Point could end up providing the UK government with crucial leverage in any future Brexit negotiations. But it also risks souring bilateral relations with China at a time when the UK needs global partners more than ever before. By Don Quijones, Raging Bull-Shit.
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