Universal Registration Document 2021

2. Risk factors and control framework

  • the legal framework for the European Taxonomy (1) for Sustainable Finance. The Complementary Delegated Act for nuclear and gas activities was adopted on 2 February 2022 by the European Commission. Subject to the procedure before the Parliament and the Council, it will enter into force as from 2023.
b) Main risks

  • Major impact of the exceptional increase in the volume of the ARENH (government announcement of 13 January 2022):

    The decision requiring EDF to sell to its competitors a supplementary ARENH volume of 20TWh at a price of €46.2/MWh poses several risks:

    • Risk of instability of the regulatory framework, with a major impact on EBITDA.

    • This late decision comes at a time when the ARENH scheme for 2022 was closed and EDF had organised its hedging accordingly. EDF will therefore have to buy electricity to deliver at a much higher price than it will have to sell it to its competitors.

      The texts implementing these measures were published on 11 March. They set the price at which EDF will buy back the additional 20 TWh of ARENH that should be provided to suppliers in 2022

      The impact of these regulatory measures on the Group's EBITDA for 2022 had been estimated, for illustrative purposes, at approximately €(8.4) billion based on market prices at 31 December 2021. On the basis of the terms and conditions defined in the Decree published on 12 March 2022, and given the information available to the Group, the estimated impact on the Group's EBITDA for 2022 has been re-evaluated at approximately €(10.2) billion.

    •  Legal risks: this situation could lead to legal risks (appeals, litigation, new regulatory instabilities...)
    • Risk that these emergency measures will be extended beyond 2022.

    This situation, which embodies a risk that has been raised for several years, carries major risks for the EDF group: financial position, assessment by the rating agencies and ability to finance the strategy.

  • General risks related to the existing ARENH scheme

    Regardless of the corresponding exceptional situation the announcements of 13 January 2022, as long as the Arenh scheme exists, it exposes EDF to the following risks:

    • since the ARENH mechanism is globally optional and free of charge, it gives suppliers opportunities for arbitrage between the ARENH mechanism and the market price, to the detriment of EDF, and exposes EDF to major uncertainties that have a negative impact on the effectiveness of its energy market risk management; as a result, EDF is highly exposed to falls in wholesale electricity market prices when their total level (energy + capacity)is below the ARENH price (currently €42/MWh) for the year of delivery in question. Conversely, the positive impact of wholesale electricity market price increases is limited when their total level (energy + capacity) is above the ARENH price;
    • in addition, there is a risk that the ARENH volume will be increased on a permanent basis without sufficient price changes, since the Energy-Climate Act now offers the French State this possibility. It could result in further reducing EDF’s ability to benefit from wholesale market prices for electricity when their total level (energy + capacity) is above the ARENH price;
    • furthermore, the implementation of the mechanism was the subject of disputes in 2020 and 2021, described in note 17 of the appendix to the consolidated financial statements. These disputes relating to the application of force majeure in the context of the Covid-19 health crisis exemplify the arbitrage carried out by certain alternative suppliers when market prices become lower than the ARENH price, by suspending the performance of the ARENH contract between them and EDF in order to benefit from cheaper supplies on the markets.
  • Risk of no reform of the ARENH in the long term The negotiations between the French State and the European Commission on a future regulation were put on hold in the summer of 2021 with no indication of a date on which the discussions will be reopened: the main risks relate to the level of prices, the scope of the regulation, the French State’s ability to negotiate sufficient terms of compensation and proportionate consideration with the European Commission. Thus, there is a major risk of a lack of comprehensive regulatory reform applicable to the sale of the Group’s nuclear generation in France or a reform that is not in the interests of EDF, particularly in terms of the Group’s ability to finance its strategy.
  • Other price and tariff risks
    • TURPE: the French Energy Regulation Commission (CRE) deliberations in January 2021 formalised the implementation of TURPE 6 HTB and TURPE 6HTA/BT as from 1 August 2021. The risk involves whether the level of compensation of network operators is sufficient to enable them to carry out the tasks entrusted to them beyond the TURPE 6 tariff period.
    • Price of CO2: the revision of the EU Emissions Trading Scheme (EU-ETS) could introduce many uncertainties and risks regarding the level and predictability of prices.
    • Emergency supply: there is a risk of not being able to recoup the costs incurred in providing emergency supply to customers who can leave EDF’s portfolio at any time, subject to prior notice to the companies. This risk exists in both the transitional and permanent arrangements for emergency supply.
  • Risks related to the energy mix
    • It could therefore be decided to shut down one or more reactors in the EDF fleet prematurely, not as a result of an industrial choice but as a result of the application of orientations reflected in the multi-year energy programme (PPE) or a programming law. Such decisions should lead to EDF being compensated for the harm suffered, as reiterated by the French Conseil constitutionnel (the French constitutional council) in a decision of 13 August 2015. There is a risk that EDF would not be compensated for the entire loss.
    • The closure of controllable production assets (nuclear, coal, fuel oil, etc.) could increase the risk of tensions on the supply-demand balance, particularly during the next few winters;
    • Risk of absence or delay in the formal decision by the State to launch a programme for the construction of new EPR2 or even SMR nuclear reactors, particularly in view of the Energy Programming Act.
  • Risks associated with the European context (Taxonomy)
    • The Delegated Act published on 2 February 2022 providing for the inclusion of nuclear power in the European taxonomy as “transitional” energy could be rejected by the European Council or by the Parliament (deadline mid-2022). It could also be subject to an annulment action before the European courts. In addition, the classification as transitional energy might insufficiently recognise decarbonised nuclear electricity, with potential consequences for access to financing for new projects. The text does not include the fuel cycle or waste management. Finally, the conditions set out in the Delegated Act for the classification of nuclear energy as an aligned activity may not be fully met.
c) Control actions

Control actions are limited for those risks, which stems from decisions originating outside the Company. Nevertheless, the control actions include the following :

  • analysis of the potential consequences of published or still pending texts notably the decree n° 2022-342 and the orders of 11 March in the purpose of identify the impact on the Group, concerning the ARENH and the tariff shield, see in particular the action plan to strengthen the the Group’s balance sheet structure (note 23 to the consolidated financial statements consolidated financial statements for the year ended 31 December 2021 in section 6.1 and paragraph Perspectives section 5.5);

(1) Resulting from the European regulation 2020/852 of 4 June 2020 aiming to establish a classification of economic activities according to their contribution to the achievement of environmental objectives, supplemented by a Delegated Act adopted on 4 June 2021 aiming to determine the conditions under which economic activities can be considered as substantially contributing to the climate objectives. On 6 July 2021, the so-called “Article 8” Delegated Act on the content and presentation of the information to be provided was adopted. Finally, on 2 February 2022, the Complementary Delegated Act covering nuclear and gas activities was published and, subject to the procedure before the Parliament and the Council, will enter into force as from 2023.