How Can Europe Lagging Energy Sector Rebound?

The European energy sector finds itself in something of a perfect storm. Thanks to sustainable alternatives like solar, wind and hydroelectric, the wholesale price of electricity has fallen. Consumers are turning away from traditional energy sources or otherwise using less. With governments and the European Union passing stricter regulations on existing nuclear power plants, costs for upkeep and safety of existing energy fleets are rising.

As a result, many major European energy units are hemorrhaging money, or otherwise abandoning existing technologies and investing in modern and sustainable (but also highly expensive) methods.

The largest energy provider, though, has held steady. Electricite de France SA (EDF), the world’s biggest nuclear provider, has actually increased its earnings year-over-year through the first half of 2014.  On July 31, EDF posted a 3.1% rise in first-half earnings before interest, taxes, depreciation and amortization (EBITDA). Overall, the company, in which the French government has an 85% ownership stake, earned $12.68 billion as opposed to $12.3 billion over the same period in 2013. While that may not sound like much, simply improving cash value is a feat considering the current environment.

As has been thoroughly reported elsewhere, the European energy sector has been in a tailspin thanks to the confluence of negative factors mentioned above. Not only is the main competition (renewable energy) heavily subsidized, but across Europe the current nuclear facilities are often outdated, with the average age of a European nuclear reactor clocking in at 30 years. The costs of upgrades run in the billions.

EDF, which operates 58 reactors in France, is not immune to the rising expenditures. But unlike other companies, EDF amortized its fleet and will therefore not be at such a disadvantage.

In addition to foresight, much of the company’s success is down to a flexible and far-reaching business plan. When hydroelectric output stalled this winter, EDF capitalized on rising nuclear output at its operations in the U.K. and France. In all, the company proposes a 3% organic growth rate for 2014.

On July 25, EDF finalized a deal with Veolia Environnement SA to split the ownership of Dalkia, their energy-services venture. As the terms indicate, EDF takes sole propriety of the operations within France while Veolia, Europe’s biggest water uitility, acquires the international operations. The deal nets EDF $720 million as part of the split. EDF retains a 34% ownership stake in Dalkia, a company which raked in $11.1 billion in revenue in 2013.

EDF has also been willing to embrace green energy. The company, which owns the world’s largest electric vehicle fleet, embarked on government-funded partnerships with Renault-Nissan and Peugeot. EDF to support development of hybrids and plug-ins.

Despite EDF’s current success, there is a difficult road ahead. In addition to the rising operating costs, there is pressure from the international community to retire reactors after their lifespan ends — rather than refurbishing them and continuing to burn nuclear. Following the Fukushima disaster in 2011, the governments of Japan and Germany agreed to retire their reactors. France, as well, is expected to make a decision on its fleet by 2019. EDF will be faced with a difficult decision, whether to invest billions in infrastructure rebuilds or invest billions to transition out of nuclear energy altogether.

CEO Henri Proglio, who has been at the EDF helm since 2009, has imbued the company with a progressive mentality. Often perceived in France as a government irritant, Proglio has done much to reverse that image of late. He has worked with French president Francois Hollande’s five-year energy transition plan, and welcomes the uptick in sustainable alternatives. Proglio is confident that a re-industrialized France, along with a gradual population increase, would allow EDF to continue thriving even with 60% or less of the available market.

France is ramping up for a transition from traditional energy sources. The European market as a whole — which EDF still dominates — is in a state of flux. In November, the French government will entertain candidates for EDF’s presidency. While France prides itself on socialism and competition, even Hollande and his team seem to realize Proglio is most fit for re-election. One only needs to check EDF’s profits during his presidency, a volatile period in the market, for proof of that.

Image Source: Diogo Martins