Universal Registration Document 2021

General assumptions

In the general context at 30 June 2021, following a financial year 2020 affected by the Covid-19 pandemic, the Group entities’ market conditions and operating performance presented no indication of impairment in 2021. However, some specific situations required impairment tests, which led to recognition of impairment of €(502) million at 30 June 2021 on individual assets, principally in EDF Energy’s nuclear power plants in operation in the UK, and in France some of EDF Renewables’ photovoltaic plants and the Cordemais plant, following discontinuation of the Ecocombust project.

At 31 December 2021, the Group applied its usual method for impairment testing, updating the annual tests for goodwill and intangible assets.

Electricity prices

Over the market horizon (generally three years), the forward prices used in the impairment tests are the market prices observed at the end of December, including hedged positions, which (to an even greater extent than at 30 June) were significantly higher than observed forward prices at the end of 2020, in all geographical zones.

Over the long-term horizon, these tests use price curves constructed analytically by assembling blocks of assumptions and fundamental models of the supply-demand balance, in an annually updated scenario-building process.

The long-term scenarios constructed for electricity prices in countries where the Group does business are consistent with the trajectories of European decarbonisation targets, as defined in the 2015 Paris climate agreement, then the June 2021 “Fit for 55” package, setting a target 55% reduction in greenhouse gas emissions (compared to 1990 levels) by 2030. The scenarios used mainly include high CO₂ prices that can lead to carbon-free electricity production in Europe, and the economy more generally through electrification of uses. At this stage, however, the scenarios used for impairment testing do not include an assumption that the net-zero target for Europe will be attained by 2050.

The long-term price curves in the 2021 scenario rise until 2040, then decrease slightly due to the projected development of new-generation Combined Cycle Gas (CCG) power plants. Compared to the 2020 scenario, the long-term curves are higher until 2040 with a rise in the baseload power price of +€5 to +€10/MWh in the four core countries (France, the United Kingdom, Italy and Belgium), followed by a slight reversal in the trend expected for the last decade up to 2050, but on a smaller scale (-€1 to -€5/MWh). There are several explanatory factors for this pattern:

• a rising trajectory of CO₂ quotas in the ETS (EU Emissions Trading System), incorporating the European Union’s stricter commitments from the start of the horizon to achieve a substantial reduction in greenhouse gas emissions from 2030 and aim for net-zero by 2050. The upward effect of CO₂ on electricity is lessened towards the end of the horizon by development of CCG plants with carbon capture and storage, which will make variable costs for those plants largely independent of carbon emissions;
• lower gas prices in Europe at the end of the horizon compared to the 2020 scenario, due to downward revision of long-term imports with greater penetration of the electricity mix by renewable energies (particularly in Europe, China and Japan) and upward revision of assumptions of LNG supply in regions with low-cost resources (particularly Russia and Qatar);
• updated assumptions regarding supply and demand for electricity, reflecting a decline in demand for electricity in the medium term due to an increase in energy efficiency measures. This trend self-corrects over the longer term, with demand rising in line with the growth in electric vehicles and electrolytic hydrogen.

As these assumptions are crucial in determining recoverable value, sensitivity analyses are conducted on long-term price curves when impairment tests are carried out.

Furthermore, for the assumptions concerning capacity mechanisms, the necessary non-market revenue is expected to be higher across European countries generally than in the 2020 scenario, due to the downward revision of the return of the peaking plants on the Energy Only Market, particularly given the upward revision of CO₂ prices. To break even and stay on the market, these facilities are having to draw on other revenue sources, including capacity revenue and ancillary services. This structural trend also concerns France, although the headroom is expected to recover in 2026 with the arrival of new capacities in the next few years, notably France’s first offshore wind farm, the Flamanville EPR, and the Landivisiau CCG plant.

Discount rates

The discount rates used in impairment tests are lower than at 31 December 2020 for all Euro zone countries and the United Kingdom.

This is due to the general downward trend in risk-free rates despite an upturn at the end of the year, combined in the United Kingdom with a higher corporate income tax rate. In Italy, the sovereign risk premium, which had been raised in June 2020 due to the specific national context, decreased due to rate tightening on the markets, leading to a more pronounced decrease in the WACC.

The year-on-year decrease in the principal WACC rates used in the tests is around 10 to 30bp for France, United Kingdom and Belgium and 50bp for Italy. The test results have been subjected to analyses of their sensitivity to the discount rate.

At 31 December 2021, the macro-economic context presented above did not involve any major new risk for the Group compared to the risks already taken into account in prior financial statements; the impairment recorded relates to risks specific to certain CGUs and specific assets.