Over the past decade, a prodigious amount of effort has been exerted in delivering the £24.5 billion Hinkley Point C project to a position where going to the markets to raise the necessary finance is a credible scenario.
Already, an eye-watering – and inflation-linked – £92.50 per MWh contract for difference (CfD) has been pledged by the government for an unprecedented 35 years. But new challenges keep arising. In the latter part of 2015, the deep-seated financial problems at Areva, France’s key nuclear construction company, became more serious.
Concerns are now being expressed about the ability of EDF itself both to absorb much of Areva and to finance a massive nuclear investment programme, mainly in France. Many existing nuclear plants there are nearing the end of their natural lives.
Since the start of the year, stock markets have become very nervy on the back of falling commodity and energy prices, which are partly related to the economic plight of China, where rumours of gloom abound. The oil price remains a particularly worry, although – theoretically at least – it should confer major benefits on non-oil producing countries.
The plunge in oil prices has been staggering. Just 18 months ago, Brent Crude was trading at well over $100 per barrel; the current figure is below $30. Inevitably, such trends have already gravely impacted oil producers, especially in the North Sea.
Gas prices have also fallen sharply, which should make the construction of Combined Cycle Gas Turbine (CCGT) plants far more attractive. If gas prices remain low, a boom in CCGT baseload investment should be expected.
For EDF, though, to raise the necessary funds against this distinctly unpromising energy background will be extremely difficult.
In recent years, it has focused on China to provide much of the financing; various agreements have been reached. But with the profound uncertainties hanging over the Chinese economy, activating that planned funding will be challenging.
Elsewhere, likely investors may be thin on the ground, especially if widespread deflation brings a lengthy bear market in its wake.
Of course, the ingrained pessimism of recent weeks may well be replaced by a tide of optimism. However, there remain many clouds on the horizon which seem unlikely to clear in the short term: China; collapsing oil and gas prices; recurring concerns about bank stability; and a possible lurch into global recession among them.
As such, many institutional investors may be seeking to unload some of their asset investments as the attractions of holding cash become more evident. If this trend accelerates, asset values – many of which underpin lending – will inevitably fall.
Nonetheless, over the next few months – or even weeks – EDF will need to decide whether or not to go ahead with the Hinkley Point C project.
It is a mighty big call for Jean-Bernard Levy and his board – all the more so given the gathering economic gloom.
Nigel Hawkins, director, Nigel Hawkins Associates