The long-term issuer and senior unsecured ratings of Électricité de France (EDF) have today been downgraded by Moody’s Investors Service (Moody’s) from A3 from A2, together with its perpetual junior subordinated debt ratings to Baa3 from Baa2.
Today’s rating downgrade reflects Moody’s view that the action plan announced by EDF in April 2016, which includes government support, will not be sufficient to fully offset the adverse impact of the incremental risks associated the Hinkley Point C (HPC) project on the group’s credit profile.
On 27 September 2016, EDF’s Board of Directors confirmed it will proceed with the construction of the HPC new nuclear power plant in the UK following the approval of the project by the UK government on 15 September 2016. Moody’s believes that the significant scale and complexity of the HPC project will affect the group’s business and financial risk profiles.
This is because the HPC project will expose EDF and its partner China General Nuclear Power Corporation (CGN, A3 negative) to significant construction risk as the plant will use the same European Pressurised reactor (EPR) technology that has been linked with material cost overruns and delays at Flamanville in France and Olkiluoto 3 in Finland. In addition, none of the four plants using the EPR technology currently constructed globally is operational yet. The total construction cost of the project, of which 66.5% will be funded by EDF and the remaining 33.5% by CGN, is estimated at GBP18 billion with the first unit expected to be commissioned not before 2025. EDF will have to provide funding to cover its share of the investment, expected to peak at around EUR2 billion or up to 15% of its annual capex by the beginning of the next decade. The group’s balance sheet will therefore have to shoulder the financial implications of a very long construction phase during which the investment will not generate any cash flow.
The incremental risks associated with HPC will result in a higher business risk profile and the rating downgrade reflects that EDF cannot mitigate this additional pressure at the current rating level with additional financial flexibility despite the progress made under the action plan announced in April 2016, including entering into exclusive negotiations to sell a 49.9% stake in RTE for EUR4.2 billion. Other measures announced but yet to be executed under the action plan include a EUR4 billion capital increase as well as further asset disposals so as to reach a total of EUR10 billion by 2019.
Moody’s views these measures as a bridge over the 2015-19 period to finance the group’s ongoing negative free cash flows resulting from the need to fund an extensive capex programme which, in addition to HPC, include the maintenance and upgrade of its domestic nuclear fleet, the development of renewables and the roll out of smart meters in France. Given the political endorsement of the HPC project and its scale relative to the cash flow generation capacity of EDF, the group’s revised standalone credit quality or baseline credit assessment (BCA) of baa2 reflects Moody’s expectation that the Government of France (Aa2 stable), EDF’s majority shareholder, would continue to provide financial relief if needed. This would be potentially necessary after 2019 if the group’s cash flow generation does not strengthen sufficiently as a result of higher power prices or additional sources of revenues such as capacity payments to cover the required investments.
Taking into account the planned disposals and capital increase, Moody’s expects that EDF’s funds from operations (FFO) to net debt will be in the mid to high teens in percentage terms from 2017 onwards, a level which the rating agency views as consistent with the baa2 BCA and A3 rating, factoring in the increased risk of cost overruns and delays associated with the HPC project. Moody’s notes that EDF’s headroom versus this guideline metric will likely be limited in the next two to three years as hedges roll off and low power prices exert pressure on cash flows.
The A3 rating also takes into account the group’s scale and geographic diversification, as well as the stabilising contribution of regulated activities in France and renewable activities, which accounted for 31% and 6%, respectively, of group EBITDA in H1 2016. Finally, given EDF’s 84.9% ownership by the French government, EDF’s A3 rating continues to incorporate a two-notch uplift from its baa2 BCA based on the agency’s estimate of a high degree of government support.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody’s expectation that EDF’s FFO to net debt will be in the mid to high teens in percentage terms in the next two to three years, taking into account the impact of the planned capital increase and asset disposal programme.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward rating pressure is unlikely in the medium term given the limited headroom expected against the ratio guidance for the A3 rating. The ratings could nevertheless be upgraded provided that EDF demonstrates credit metrics in excess of the guidance above on a permanent basis; most likely as a result of the introduction of regulatory measures such as carbon price floor or capacity payments that would support the group’s business model.
The ratings could be downgraded if (1) credit metrics fall below Moody’s guidance for the A3 rating; or (2) EDF were to be significantly exposed to AREVA NP’s liabilities. In addition, downward rating pressure could arise if a change in the group’s relationship with the government were to cause Moody’s to remove the uplift for
government support, or if there were to be a significant downgrade of France’s government rating.
The methodologies used in these ratings were Unregulated Utilities and Unregulated Power Companies published in October 2014, and Government-Related Issuers published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.
Will Self-Driving Cars Be Better for the Environment?
Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?
But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?
The Big Picture
The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.
That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.
One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.
There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.
As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.
Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.
Make and Model of Car
Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.
On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.
The Bottom Line
Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?
Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.
New Zealand to Switch to Fully Renewable Energy by 2035
New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.
New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.
Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.
Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”
The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.
Zero net emissions by 2050
Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.
Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.
She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.
Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”
A worldwide shift to renewable energy
Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.
Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.
Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.
Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.
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