Electricity Update – France and Texas

France and Nuclear Power – Losing Its Edge

France has long pioneered a tradition of being reliant on nuclear power. France has 59 nuclear reactors and delivers a very high percentage of their total power needs through nuclear power, as well as being a major exporter of electricity to adjacent nations. France chose nuclear power after WW2 because they lacked local energy resources and had a strong engineering capability.

The company that runs the nuclear industry is called EDF. EDF is 84% owned by the French government, so you could basically say that the French government owns by far the most significant portion of their own electricity industry (and 15 nuclear reactors in the UK, to boot). Currently EDF pays a very high dividend, yielding 7.7%, due to the fact that their market capitalization has declined precipitously while the company has tried to keep the dividend constant.

For many years EDF provided France low cost electricity, which provided a competitive advantage against their industrial neighbors such as Germany. Today, however, Germany has a cost advantage over France in terms of power, since the price of coal has dropped and Germany uses a significant amount of coal to burn their own electricity. One of the main reasons that the price of coal has dropped is the rise of natural gas in the USA, which in turn allows the US to export their surplus coal overseas to Europe. This article from Bloomberg provides a good overview of the competitive situation.

“French energy used to be competitive,” said Emmanuel Rodriguez, head of energy for the French unit of ArcelorMittal, the world’s biggest steelmaker, which also has operations in Germany. “This model is crumbling. Germany is now better than us whereas a decade ago they were much more expensive.” French power prices for big industrial users are projected to average as much as 25 percent higher next year than in Germany, according to Uniden, a lobby whose members consume 70 percent of electricity used by industry in France.

In another sign of the upside-down world we live in, EDF’s dividend at 7.7% is far higher than what they are paying in yield on debt of 4.375%, even debt that looks suspiciously like equity here in the US (a perpetual dated bond is debt without a maturity date).

France is also struggling as they try to build new nuclear reactors. The next generation plant being built for EDF by Areva has had cost overruns and schedule delays:

EDF has previously said France’s first EPR would cost €3.3 billion and start commercial operations in 2012, after construction lasting 54 months. The estimated cost has now increased to €8.5 billion ($11 billion) and the completion of construction is delayed to 2016.

Energy Futures Holdings

Energy Future Holdings took a major Texas utility (TXU) private in a 2007 deal that leveraged up the company with $45 billion in debt in 2007. 2007 was a horrible year for most deals across almost all sectors including real estate as it was the “height” of the bubble before it all came crashing down. TXU, one of their entities, has bonds trading as low as 15 cents on the dollar (for bonds that have an interest rate of 10.25%, to boot) per this Bloomberg article.

The company has struggled to be profitable ever since the LBO, as the shale revolution created a glut of natural gas, pushing U.S. prices to the lowest since 1999 last year

While EFH is not a public company, they do have publicly traded debt and thus they have an active investor relations department. If you read through one of their documents you can see their expectations for natural gas prices and how they have been able to keep the company going for as long as it has due to a strategy of hedging against low priced natural gas, as well as through what seems to be very effective management of costs. However, the large debt load likely has to be restructured since a company that was built to profit from a marginal cost of power based on $14 / unit priced natural gas cannot service that debt load with the cost of natural gas between $2 – $4 / unit.

Cross posted at LITGM

8 thoughts on “Electricity Update – France and Texas”

  1. Isn’t Germany trying to correct this situation by reducing their legacy generating capability in favor of “renewables”?

  2. Germany is investing a lot in renewables. They still have a decent number of nuclear units too, and they also burn a lot of coal.

    By not investing in NEW nuclear plants and continuing to run (and grow) their coal fleet, they benefit from the fall in world wide coal prices and can run their existing assets without much incremental investment in the near term.

    The government I believe is picking up much of the cost of renewables rather than passing it on (directly) to businesses.

    I will have to research this more. It is hard to determine what is actually happening sometimes from what is being talked about in energy.

  3. “Even Germany, which has huge domestic reserves of cheap lignite, is lowering its reliance on coal. RWE, Germany’s largest electricity generator, has reduced the proportion of coal-fired plants from 56 per cent of total capacity in 2006 to about 50 per cent at the end of 2011. By 2020, it sees that dropping to about 35 per cent as the proportion of renewables in the energy mix rises.

    However, Germany and the Netherlands are due to build 12.5 gigawatts of new coal capacity between 2012 and 2015, offsetting the 11GW that will be retired in the UK over the next four years.”


    I guess it will all come down to politics. And my perception is that the environmentalist Left in Germany is even more ferocious and non-rational than its equivalent in the US.

    Ralf, are you around?

  4. What is happening in Germany:

    “Solar Subsidy Sinkhole: Re-Evaluating Germany’s Blind Faith in the Sun” By Alexander Neubacher January 18, 2012


    “The costs of subsidizing solar electricity have exceeded the 100-billion-euro mark in Germany, but poor results are jeopardizing the country’s transition to renewable energy. The government is struggling to come up with a new concept to promote the inefficient technology in the future.”

    * * *

    “The only thing that’s missing at the moment is sunshine. For weeks now, the 1.1 million solar power systems in Germany have generated almost no electricity. The days are short, the weather is bad and the sky is overcast.”

    * * *

    “Solar lobbyists like to dazzle the public with impressive figures on the capability of solar energy. For example, they say that all installed systems together could generate a nominal output of more than 20 gigawatts, or twice as much energy as is currently being produced by the remaining German nuclear power plants.

    “But this is pure theory. The solar energy systems can only operate at this peak capacity when optimally exposed to the sun’s rays (1,000 watts per square meter), at an optimum angle (48.2 degrees) and at the ideal solar module temperature (25 degrees Celsius, or 77 degrees Fahrenheit) — in other words, under conditions that hardly ever exist outside a laboratory.–http://www.spiegel.de/international/germany/solar-subsidy-sinkhole-re-evaluating-germany-s-blind-faith-in-the-sun-a-809439-2.html

    “In fact, all German solar energy systems combined produce less electricity than two nuclear power plants. And even that number is sugarcoated, because solar energy in a relatively cloudy country like Germany has to be backed up with reserve power plants. This leads to a costly, and basically unnecessary, dual structure. Figures indicating the peak performance of solar energy systems are easily misunderstood, a report by the German Physical Society says. “Essentially,” the report concludes, “solar energy cannot replace any additional power plants.”

    “In Germany, solar is by far the most inefficient technology among renewable energy sources, and yet it receives the most subsidies. Some 56 percent of all green energy subsidies go to solar systems, which produce only 21 percent of subsidized energy.

    “Woodland Heists: Rising Energy Costs Drive Up Forest Thievery” By Renuka Rayasam 01/17/2013


    “With energy costs escalating, more Germans are turning to wood burning stoves for heat. That, though, has also led to a rise in tree theft in the country’s forests. Woodsmen have become more watchful.

    “With snow blanketing the ground, it’s the perfect time of year to snuggle up in front of a fireplace. That, though, makes German foresters nervous. When the mercury falls, the theft of wood in the country’s woodlands goes up as people turn to cheaper ways to heat their homes.”

  5. EFH could better hedge their position by taking the money they were going to use to build Comanche Peak 3 and 4 and build a couple of combined cycle plants. They had a faulty model when they bought out TXU that assumed gas would not be a competitor. They did not notice or discounted all the gas drilling going in the Barrett Shale formation in Hood County. This drilling had been going on for several years before the buyout and was already paying out when the deal was set.

  6. Apparently there is a .05cent (euro) /kwh surcharge on residential electricity in Germany to pay for the green nonsense. Sorry I wasn’t more specific in my previous post here.

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