Irreconcilable Aims Generate Uncertainty Over Nuclear

BMI View: Despite President Hollande vowing to reduce France's reliance on nuclear power during his 2012 election campaign, the level of political support for the scheme appears questionable; as does the feasibility of cutting nuclear without spiking electricity prices and damaging the competitiveness of French industry - another key election pledge.

President Francois Hollande and his Socialist party made the initial promise as part of an electoral pact with the anti-nuclear Greens and, as a consequence, it appears he has been left in a difficult position. While he has promised an energy transition that would see renewables grow at the expense of both nuclear and fossil fuels, the problems associated with phasing out nuclear - and the huge costs involved - are evident across the border in Germany. As such, it is clear that the cost of such a transition to France's already spluttering economy could be significant - something that is unlikely to be popular with the electorate and may strain France' already fragile financial position.

At the very least, the French government's muddled position on nuclear energy is creating a great deal of uncertainty. Hollande has yet to detail how he will cut electricity generation from nuclear from around 75% to 50% of the generation mix by 2025; a situation that, in our view, is indicative of the fact that his competing aims will be very difficult - if not impossible - to reconcile. To this end, we are not the only ones to question the government's ability to meet its ambitious nuclear targets. A government commission, the Parliamentary Office for Evaluation of Scientific and Technological Options (OPECST), published a report in September 2013 which found that France would be vulnerable to price shocks if the government persists with its nuclear phase out. OPECST called for a delay in the start of the nuclear phase-out programme to 2030, and reported that a 50% reduction in nuclear energy generating capacity is more realistic by 2050.

Hollande Risking A Nuclear Reaction?
France - Nuclear Reactors

Irreconcilable Aims Generate Uncertainty Over Nuclear

BMI View: Despite President Hollande vowing to reduce France's reliance on nuclear power during his 2012 election campaign, the level of political support for the scheme appears questionable; as does the feasibility of cutting nuclear without spiking electricity prices and damaging the competitiveness of French industry - another key election pledge.

President Francois Hollande and his Socialist party made the initial promise as part of an electoral pact with the anti-nuclear Greens and, as a consequence, it appears he has been left in a difficult position. While he has promised an energy transition that would see renewables grow at the expense of both nuclear and fossil fuels, the problems associated with phasing out nuclear - and the huge costs involved - are evident across the border in Germany. As such, it is clear that the cost of such a transition to France's already spluttering economy could be significant - something that is unlikely to be popular with the electorate and may strain France' already fragile financial position.

At the very least, the French government's muddled position on nuclear energy is creating a great deal of uncertainty. Hollande has yet to detail how he will cut electricity generation from nuclear from around 75% to 50% of the generation mix by 2025; a situation that, in our view, is indicative of the fact that his competing aims will be very difficult - if not impossible - to reconcile. To this end, we are not the only ones to question the government's ability to meet its ambitious nuclear targets. A government commission, the Parliamentary Office for Evaluation of Scientific and Technological Options (OPECST), published a report in September 2013 which found that France would be vulnerable to price shocks if the government persists with its nuclear phase out. OPECST called for a delay in the start of the nuclear phase-out programme to 2030, and reported that a 50% reduction in nuclear energy generating capacity is more realistic by 2050.

It is in this context that Industry Minister Arnaud Montebourg's announced on November 11 that the French government would not shut anymore nuclear reactors once the country's oldest plant closes in 2016. Montebourg was referring to the closure of EDF's 1,800MW (2x900MW units) Fessenhiem plant, which will be taken offline at the same time as the utility plans to bring online its long-delayed 1,600MW reactor at Flammanville in Normandy. Montebourg told Bloomberg that closing down more reactors was 'not in our strategy'; a statement that is very informative with regards to the nuclear debate. Critically, his views are much stronger than those outlined by Hollande himself in September 2013. While Hollande has said capacity would 'be capped at the current level', Montebourg's statement appears to go further and, as such, appears to run counter to the Socialist's initial election pledge.

Hollande Risking A Nuclear Reaction?
France - Nuclear Reactors

Yet, while we note that while this might be cheered by nuclear-sector trade unions and industry leaders, who want nuclear capacity to be secured so as to ensure electricity remains relatively cheap, it could raise the ire of The Greens, who have two ministers in government and help to ensure legislation can move through parliament. Notably, The Greens have previously threatened to withdraw support for the Socialist government over the slow pace of energy sector reform.

Nuclear Levy To Power Green Agenda

With these competing dynamics in mind, it is clear that much will depend on the government's plans to enact energy transition laws in 2014 (although a parliamentary vote unlikely until towards the end of 2014). The Greens have already come out in support of plans to introduce a new levy on nuclear as well as a tax on fuel consumption, which it is hoped will raise the billions needed to support renewables and energy efficiency measures. While the exact nature of any levy on nuclear is unclear (and will likely be strongly opposed by EDF), the tax on fuel consumption, referred to as the 'climate contribution', will affect petrol, diesel, coal, oil, gas and heavy fuel.

However, while we note that this is one mechanism to support the country's ambitious plans to cap nuclear at 50% and boost renewables, we question whether even these taxes alone will raise enough in revenues to support such ambitious plans - with Hollande putting the projected cost of the transition at an estimated EUR20bn a year.

A German Template?

To this end, it is notable that European neighbour Germany decided to phase-out nuclear (albeit completely) following the Fukushima disaster Japan and the costs have been huge. Environment Minister Peter Altmaier has said the cost of Germany's 'Energiewende' (energy transition) to renewables could be a staggering EUR1trn by the 2030s - with domestic industry bemoaning the fact that rising electricity prices (due to subsidies) risk making the Germany economy uncompetitive. Furthermore, rather counter-intuitively, the influx of renewables to the grid has pushed wholesale electricity prices to all-time lows in Germany - favouring the burning of cheaper coal for baseload generation and boosting emissions ( see 'Energiewende To Dominate Pre-election Debate', June 5 ) - something France would clearly want to avoid. While the conditions in both countries are far from identical, the situation in Germany highlights the type of problems France could face as it moves to reduce its exposure to nuclear. Industry Minister Montebourg has made reference to this very point himself.

Nuclear Generation Critical To France
France - Electricity Generation By Type, 2012-2022

With this in mind, we also highlight that France's precarious macroeconomic position could ultimately prohibit any nuclear closures - based on concerns about the aforementioned costs of such a transition. With BMI's Country Risk team forecasting real GDP growth of 0.0% in 2013 and tepid growth thereafter (although the macroeconomic situation in Europe is improving), we highlight that we have also downgraded our projections for France's fiscal deficit. We expect the budget deficit to arrive at 4.2% of GDP in 2013 and 3.6% of GDP in 2014 (above government targets), and expect mounting pressure on the government to engage in more concerted fiscal consolidation over the coming quarters, particularly as lower growth begins to translate into lower government revenues. France already has one of the biggest public debt piles in Europe and we note that introducing the amount of renewable capacity needed to replace a large amount of shuttered nuclear facilities would certainly be an expensive undertaking.

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