Nuclear and emerging markets to fuel EDF growth - analysis

The takeover of British Energy Plc, which sources say EDF hopes to finalize this week, would be a step forward in its strategy but it would have to be followed by more projects. EDF, which has a strong position in nuclear power, will have to reinforce its European presence and also look into high-growth areas such as Asia and eastern Europe. “If EDF wants to really change its portfolio within the next 10 years and use its cash rather than give it back to shareholders, it should develop in emerging markets,” said Christophe Moret, an energy expert at strategy consultants Estin & Co in Paris. “In China, the group could take part in bringing electricity to rural areas, upgrading networks and improving the quality of supply. There is an enormous potential,” he said, also citing huge needs for new power production capacity in Poland, Slovakia, Bulgaria and Romania in the next 10 years.

EDF should also diversify into gas production to compete with the likes of Italian energy company Eni and newly-merged GDF Suez, said a former EDF executive who asked not to be named. In addition, the French state-controlled group will have to stave off strong competition from leading German utility E.ON AG, which has launched a series of investments in countries such as Spain, Italy, France and Russia. GDF Suez is set to decide at the start of 2009 whether to take part in the construction of a second new-generation EPR nuclear reactor in France, a move that would make it a competitor of EDF -- operator of all of France’s 58 reactors.

 
KEY ADVANTAGE

Observers of the energy industry say EDF, which made its market debut in 2005, has thanks to its strength in nuclear power a huge advantage over its competitors in an environment of surging oil prices and climate change. „EDF’s nuclear power production is its great strength. This is a competitive energy that produces no CO2 and improves France’s independence towards oil and gas imports. This is one of the main assets of EDF,” said Colette Lewiner, an energy sector expert at management consultancy Capgemini. „Its size, its financial strength, its profitability, its competences and the fact that its capital is open are other key assets,” Lewiner said.

But with only France and Britain clearly opting for nuclear programs, EDF will need to convince other countries about the benefits of atomic power. EDF has already positioned itself in the United States and China -- where it hopes to build respectively four and two EPR reactors over the next decade -- and in South Africa, and is eyeing moves into Germany, Italy and Spain, should these countries decide to relaunch nuclear programs. A move outside EU borders is all the more crucial for EDF because the liberalization of the energy market within the bloc has so far not led to tariff increases for the company -- with state-fixed French retail and industrial electricity prices remaining well below market prices.

Since July 2007, EDF clients can opt for market prices but these have risen sharply as they are based on peakload power production capacity, such as oil-or-gas-fired plants which can be switched on and off fast to meet peak demand. France, which represents 54% of EDF’s sales and 66% of its core earnings, is holding on to the principle of state-fixed tariffs to protect retail and industrial clients. This represents a significant loss in earnings for the 85% state owned group, which could benefit from lower production costs than its rivals to increase its margins with higher power prices. But this could change after the French presidency of the European Union ends on Dec. 31, said a source close to the European Commission, who said Brussels could ask France to put an end to state-set tariffs for industrial clients. (Reuters)