When a chief financial officer resigns over a disagreement about corporate strategy, you might think that the company has a problem. When the business in question is Électricité de France SA, France's national utility and global leader in power generation and distribution, you might wonder if the entire industry also has a problem.
Thomas Piquemal is quitting because he believes EDF is about to make a catastrophic mistake: the investment of £18-billion ($34-billion) in Hinkley Point, a British nuclear power project. The colossal price tag is for EPR reactors, a technology still commercially unproven, that will deliver 7 per cent of U.K. electricity demand. However, EDF's balance sheet is already supporting the construction of two EPRs – in France and in Finland – that are almost a decade behind schedule and massively over budget. Debt-rating agencies have already sounded warnings about the potential impact of Hinkley Point on EDF's cash flow.
Many in Britain fear Hinkley Point will turn out to be a dinosaur that produces hugely expensive electricity (almost three times the market rate), and in France taxpayers fear the capital cost could end up bankrupting an enterprise in which they control 85 per cent of the shares. Yet, the power this nuke would generate is desperately needed in the U.K. Like Canada, Britain is running out of time to replace aging and dirty power infrastructure and, unfortunately, the dash for renewables is creating problems as well as solutions.
EDF's local difficulty in the U.K. is symbolic of the huge malaise afflicting the global electricity industry. Once thought to be safe but dull money machines, exploiting local monopolies, utilities are now riding a roller coaster of volatile coal and natural gas prices, disruptive technologies, burdensome legacy infrastructure costs and continuing political and regulatory upheaval.
The energy policy objectives are sometimes difficult to reconcile or may even be contradictory – we want it clean but we also want it mean. Consider Ontario, where the business of supplying electricity has been in political upheaval for most of the past two decades. From a Crown monopoly that once supplied "power at cost," we now have unbundled utilities, sourcing power from competing generators in a heavily price-regulated market with an overriding "green" policy agenda intended to promote choice and the use of renewable energy.
Like most power markets in North America and Europe, Ontario has a huge legacy burden of replacing 80 per cent of its generator capacity (aging coal and nuclear stations). It must also re-equip a 20th century grid to cope with the demands of a world fascinated by "distributed power" – local, partly self-sufficient electricity supply, mainly based on wind, solar or biomass generation. The latter poses the biggest challenge to utilities that now face the obligation of linking up vast numbers of tiny intermittent solar-generating households, which both feed power in and take it out in daily cycles.
This sudden expansion in local generation capacity carries with it an expanding cost base that has the potential to overwhelm many utilities. In the U.S., the installed solar capacity is expected to double next year to 16 gigawatts, reaching 3.5 per cent of total generation by 2020. Accommodating millions of household mini-generators is not only a financial burden for utilities but potentially politically explosive when we consider who will ultimately be required to bear the cost of supporting a smarter and therefore more complex grid.
Consider who will benefit from rooftop solar panels and small, community micro-generation. It will be well-off homeowners and people living in affluent gated suburban communities; people who can afford the capital cost of installation. They will win twice over: First, from the feed-in tariffs they receive from their surplus kilowatts, and in addition, they win because the extra cost of the sophisticated grid that enables them to sell electricity is spread over the wider population.
For the poor, who live in bad housing and tenements and cannot generate power, renewable energy is just another tax to pay. It isn't fair but smart grids and distributed power are now public policy, worldwide. According to a global survey of utility CEOs conducted by PricewaterhouseCoopers, distributed generation will account for between a 10th and a fifth of total generation by 2020 and up to 30 per cent by 2030.
Which brings us back to Hinkley Point and the terrible conundrum of how to keep the lights on when the sun goes down and the wind drops in a world of distributed local electricity generation. The point about old-fashioned grids is that they are the ultimate in collectivist, state-driven, socialist provision. Everyone is hooked up and everyone pays for the wires that give you access to the system. You can't be semi-detached, profiting independently as you fuel the system most of the time but dipping in occasionally when you need top-ups. In order to make that possible, the grid has to be more complex and therefore more expensive.
We know it will be expensive to replace Ontario's dirty old generators but we need the backup power, even when the sun is shining. The question that politicians don't want to answer is how we pay for a renewable world in which only the wealthy can be truly green.
Carl Mortished is a Canadian financial journalist based in London.