A photo taken on July 16, 2013 in Flaman...A photo taken on July 16, 2013 in Flamanville, northwestern France, shows a dome after its installation on a reactor's building on the construction site of the third European generation Pressurised Reactor (EPR). The nuclear reactor will be put into service at the end of the year 2016, said EDF director of the future nuclear station Didier Ohayon on June 20, 2013. AFP PHOTO / CHARLY TRIBALLEAUCHARLY TRIBALLEAU/AFP/Getty Images
The installation of the reactor dome on Flamanville, a nuclear facility built by EDF which also has an EPR reactor. It has overrun its original cost estimate and will open six years later than planned © AFP

The deal for EDF to build the Hinkley Point nuclear plant in the UK could either be the salvation, or the ruin, of the French state-owned group.

Jean-Bernard Lévy, the chief executive of EDF, told journalists the decision was “a big moment” for securing the future of EDF and also signified the “relaunch of nuclear in Europe”, which should also benefit the group.

The British government confirmed on Thursday that EDF will be paid £92.50 per megawatt hour for the electricity generated by Hinkley Point C for 35-years, more than double the current rate for wholesale electricity prices.

According to the company this will deliver a 9 per cent internal rate of return over the 60 years lifespan on the £18bn project.

The fixed price offered by the UK compares to the French market, which is being deregulated, leaving the company to sell an ever-increasing share of its electricity at market prices.

This deregulation — along with falling European electricity prices — has weighed on EDF. The share price has fallen 35 per cent over the past 12 months. The company borrows money every year just to pay its dividend.

The deal is also a second chance for EDF to show that its next-generation EPR reactor technology, designed in the 1990s and seen by critics as overly expensive and over engineered, can be built on time and on budget.

Christophe Sirugue, the French minister for industry, said on Thursday that the British deal was crucial to “prove the industrial know-how of our country” on the international market following a series of setbacks.

EDF’s first attempt to build an EPR reactor plant in Flamanville, northern France, has been beset by problems. The project is six years behind schedule and €7bn over budget. Completion is now planned for next year.

A potentially serious new problem — the discovery of weakness in the steel which makes up the reactor vessel — has prompted fears that there could be another long delay, however.

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Chart: reactor diagram

The reactor’s layered safety systems
1. Reactor building
Comprising three layers, two of which are 1.3m thick reinforced concrete. Together with an inner metallic layer, they shield the reactor, the control room and the area where used fuel is stored. Designed before the September 11 attacks but subsequently emphasised, this shell can withstand the crash of a commercial airliner.

2. ‘Redundant’ safeguard systems
Duplicate safeguard systems are installed in four separate buildings. Each is designed to be able to keep the entire plant safe, even if the other three all fail. This is meant to ensure that the fuel can always be kept cool, preventing explosions and fire of the sort that struck Chernobyl.

3. Core catcher
If a meltdown caused a leak from the reactor, a multi-layered base below the reactor would collect the molten material and disperse it, helping the cooling process. Once it has cooled enough water can be added to cool it further. A core leak was narrowly averted at the Three Mile Island reactor when it suffered a partial meltdown.

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Other attempts to build an EPR plant have also run into trouble. A project by the French group Areva in Finland is decade late and more than €5bn over budget, causing the collapse of the company earlier this year.

Hinkley Point C may be the last chance for EDF to prove that the complex technology is viable and to win further orders. The company says that it has learnt all its lessons from Flamanville, and says it is confident that it can build the project on time.

Critics of the Hinkley Point deal within EDF say that while the project has potential benefits, it also carries great risks. They worry about the risk of another difficult construction programme when the company already has a stretched balance sheet.

The chief financial officer of the company, Thomas Piquemal, resigned earlier this year because of concerns that if the construction goes wrong it could end up destroying the company.

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Read more
Hinkley Point: Is the UK getting a good deal?
Inside Business: Hinkley is the peak of subsidy culture

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EDF’s €37bn of net debt dwarfs its €22bn market capitalisation. It faces an estimated €55bn bill in the coming decade just to increase the life expectancy of the 58 nuclear power stations from their current 40 years to 50.

It also has to rescue its rival Areva, buying the majority of its €2.5bn reactor business. Some fear that the £18bn Hinkley Point deal, while making up only around 15 per cent of their capital expenditure a year for 10 years, will be the final straw.

Gérard Magnin, one of France’s state representatives on the board, resigned last month over these very concerns. “Let us hope that Hinkley Point will not drag EDF into the same abyss as Areva,” said in his resignation letter.

Many financial analysts covering the company say that they are not worried about Hinkley Point destroying EDF, but they are concerned that it simply will not be profitable for company.

“Given the project history of the EPR technology, market confidence in HPC being built on time/on budget, and therefore create shareholder value, is understandably low,” said Ahmed Farman, analyst at Jefferies.

Paul Marty, an anlyst at Moody’s, said that the project, due to it’s “significant scale and complexity” would be bad for the group’s credit rating in the medium term, potentially raising their borrowing costs:

“The group’s balance sheet will have to shoulder the financial implications of a very long construction phase during which the investment will not generate any cash flow,” he said.

Martin Young, analyst at RBC Capital Markets, said that given how long the project will take to make money, “I struggle to see how this deal makes EDF attractive to equity investors.”

Analysts at Barclays say the project would have to be four years late and 34 per cent over budget before it destroys value for EDF, however.

Critics within the company — notably the unions — say it would be better to wait a few years, at least until Flamanville is finished. Many want EDF to push ahead with the so-called “New EPR”, which is a smaller cheaper model.

But in the end senior management, led by chief executive Jean Bernard Levy, and the French state, won out. EDF signed off on the project last year in a tense board meeting, with 10 for and 7 against, and the UK has now also decide to go ahead.

“Hinkley Point is both a success and a risk to EDF,” says Denis Florin, founder of Paris-based energy consulting firm Lavoisier Conseil. “It boosts their presence internationally, but they now need to prove they can build it on time and on budget.”

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