28.5 Discounting of provisions related to nuclear generation and sensitivity analyses

28.5.1 Discount rate and inflation rate

Calculation of the discount rate and inflation rate

The discount rate is determined based on long-series data for a sample of bonds with maturities as close as possible to that of the liability. However, some expenses covered by these provisions will be disbursed over periods significantly longer than the duration of instruments generally traded on the financial markets.

The benchmark used to determine the discount rate is the sliding 10-year average of the return on French OAT 2055 treasury bonds which have a similar duration to the obligations, plus the spread of corporate bonds rated A to AA, which include EDF.

The methodology used to determine the discount rate, particularly the reference to sliding 10-year averages, is able to prioritise long-term trends in rates, in keeping with the long-term horizon for disbursements. The discount rate is therefore revised in response to structural developments in the economy leading to medium and long-term changes.

Until 31 December 2018, the assumed inflation rate used was determined in line with the consensus forecast and expected inflation based on the returns on inflation-linked bonds. From 2019, as declining forecasts made short-term consensus forecast projections less appropriate, the inflation rate used was deduced from inflation swaps.

Considering the long durations of nuclear obligations for which the long-term inflation rate is needed, and the volatility according to the date of the swaps, the assumed average inflation rate at 31 December 2019 is thus 1.4% (1.5% at 31 December 2018).

The discount rate determined is thus 3.7% at 31 December 2019, assuming inflation of 1.4% (3.9% and 1.5% respectively at 31 December 2018), giving a real discount rate of 2.3% at 31 December 2019 (2.4% at 31 December 2018).

Regulatory discount rate limit

The discount rate applied must comply with two regulatory limits. Under the amended decree of 23 February 2007 and the ministerial order of 21 March 2007,

itself modified by the order of 29 December 2017, the discount rate must be lower than:

• a regulatory maximum, set until 31 December 2026 as the weighted average of two terms, the first set at 4.3%, and the second corresponding to the arithmetic average over the 48 most recent months of the TEC 30-year rate plus 100 points. The weighting given to the first constant term of 4.3% reduces on a straight-line basis from 100% at 31 December 2016 to 0% at 31 December 2026;
• and the expected rate of return on assets covering the liability (dedicated assets).
  

The ceiling rate based on the TEC 30-year rate is 3.8% (3.75% rounded up to3.8%) at 31 December 2019 (4.0% at 31 December 2018).

The discount rate used at 31 December 2019 is 3.7%.

By a letter dated 12 February 2020, the Minister of Energy and the Minister of the Economy informed EDF of their decisions to change certain regulations regarding secure financing of nuclear expenses:

• the regulatory discount rate limit will be expressed in real value, and will correspond to the Ultimate Forward Rate applicable at the date concerned, published by the European Insurance and Occupational Pensions Authority, plus 150 base points. This change will be introduced gradually on a straight-line basis over 5 years from 1 January 2020, starting from a real rate of 2.3%;
• the obligation to hold assets providing a coverage rate between 100% and 110%, to offset the impact on provisions of changes in assumptions, will be cancelled and the threshold above which withdrawals can be made from those assets will be raised from 110% to 120%. The remaining obligation in respect of 2018 (€797 million) will nonetheless remain applicable. No allocation is required in respect of 2019;
• the limitation period for necessary measures by the administrative authorities in the event of a shortfall in coverage will be increased from 3 to 5 years from the end of the accounting year in which that shortfall was recorded.
  

28.5.2 Analyses of sensitivity to macro-economic assumptions

Sensitivity to assumptions concerning costs, inflation rate, discount rate, and disbursement schedules can be estimated through comparison of the gross amount estimated under year-end economic conditions with the present value of the amount.