Significant amounts of impairment have been booked in recent years in respect of the Group’s thermal assets in the United Kingdom reducing the net book value of the remaining assets practically to zero.
The necessary investments for the Hole House and Hill Top gas storage site were fully written off at 31 December 2020, for a cost of €(13) million.
Regarding coal-fired plants, the Cottam power plant was closed in September 2019 and the Group will close the United Kingdom’s last remaining coal-fired plant, West Burton A, in September 2022.
The sale of the West Burton B gas-fired (CCGT) plant announced at the end of the first half of 2021 was completed on 31 August 2021. Impairment had been recognised on this plant several times after it first began operation in 2013, mainly due to unfavourable developments in the spark spreads and the insufficient additional income from the capacity mechanism. The limited amount of impairment booked in the 2021 half-year financial statements in addition to previously-booked impairment was reversed in the second half-year after the final sale price was established when the sale was completed.
At 31 December 2021, the Group has practically no remaining coal-fired or gas fired operations in the United Kingdom, confirming its ambition to take proactive steps for carbon-free electricity generation.
Despite several positive signals as the Covid-19 pandemic receded, the sales and supply segment was affected by the current crisis on the United Kingdom energy market that has obliged OFGEM (the Office of Gas and Electricity Markets) to apply the Supplier of Last Resort rule several times: for EDF Energy, this meant taking over the customers of Green Network Energy, Utility Point and Zog Energy. OFGEM’s tariff method also prevented suppliers from passing on the substantial rise in raw material costs to the SVT (Standard Variable Tariff) cap for residential customers in winter 2022. In the long term, the margin prospects are confirmed for the BtoB and BtoC activities, which remain relatively insensitive to price scenarios as wholesale energy costs tend to be passed on the consumers in the long run. The recoverable value for the sales and supply segment is lower than in 2020 and benefits from a favourable effect of lower WACC. Sensitivity analysis was conducted with a reduction in long term margins, and loss of market share, this indicated that the CGU is sensitive to these parameters, particularly as it has few fixed assets (mainly information systems).
The recoverable value of existing nuclear plants is determined by discounting future cash flows over their useful life, assuming a 20-year extension for the Sizewell B PWR plant, in line with Group strategy. The recoverable also value reflects the early shutdown decisions made in recent years for certain AGR plants, beginning with Hunterston, which was closed on 7 January 2022, and Hinkley Point B, to be closed no later than 15 July 2022, as announced by the Group on 27 August 2020 and 19 November 2020 respectively. It also incorporates the impact of the decision of 7 June 2021 to move Dungeness B AGR plant into the defueling phase; Dungeness had been offline since September 2018, and has had continuous specific technical difficulties (impairment of €(445) million was recognised at 30 June 2021). The updated impairment test conducted at 31 December 2021 also takes account of the decision made in December 2021 to bring forward the end of generation operations by Torness and Heysham 2 from 31 March 2030 to 31 March 2028. The operating lifetimes of the two AGR plants at Hartlepool and Heysham 1 are still scheduled to end in 2024.
Using higher, but volatile, market price forecasts, and taking into consideration possible production issues with AGR plants in view of recent history, the result of the impairment test did not lead to any change in impairment recorded in previous periods.
The recoverable value of nuclear assets is sensitive to price assumptions: a +/-5% difference over the entire horizon of the scenario used for the impairment test would have an impact of+/-£500 million on the result. The nuclear output assumptions used also have a substantial influence on the calculation: a +/-5% revision to forecasts over the entire horizon would result in a variation of +/-
£700 million in the recoverable value, all other things being equal. In addition, a 50bp increase in the discount rate would lead to a reduction of around £200 million in the recoverable value.
Following the early end of generation at the Dungeness plant, the imminent end of generation by the Hunterston and Hinkley Point B plants and the option exercised by the British government (see note 15.2.1), confirming that EDF will carry out the defueling of the stations and that the ownership of the sites will be transferred to the government, an expert review was carried out of the land adjacent to each nuclear power station (known as non-operational land). This resulted in recognition of a total £226 million on various areas of land owned by EDF Energy.
EDF Energy’s goodwill amounted to €8.1 billion (or £6.8 billion) at 31 December 2021 and mainly results from the takeover of British Energy in 2009.
The recoverable value of EDF Energy is determined by discounting future cash flows over the assets’ useful life, taking into consideration the two EPRs with a 60 year useful life currently under construction at the Hinkley Point site, a project for which the final contracts were signed on 29 September 2016. Future cash flows from these plants are determined by reference to the Contract for Difference (CfD) between the Group and the UK government. The CfD sets stable, predictable prices for EDF Energy for a period of 35 years from the date the two EPRs are first commissioned: if market prices fall below the CfD exercise price, EDF Energy will receive an additional payment. The CfD exercise price for HPC is set at £92.50/MWh (in 2012 sterling) and is indexed on UK inflation via the consumer price index (CPI). Thus, for the operation period under a CfD, future cash flows include a long-term inflation assumption. For the 25 years of operation after the CfD period, for which no forecasts exist for long-term UK electricity market prices, future cash flows include a very long-term inflation assumption and a price assumption based on the CfD exercise price of £92.50/MWh (in 2012 sterling), which is the best estimate of market price levels over this horizon.
The impairment test conducted at 31 December 2021 incorporates the estimated completion cost range announced on 27 January 2021, i.e. total project completion costs (excluding interim interest and exchange rate effects compared to the project’s benchmark rate of £1 = €1.23) of an estimated £22-23 billion (in 2015 sterling), instead of the estimate of £21.5-22.5 billion (in 2015 sterling) resulting from the previous cost revision of September 2019, and deferral of the delivery of reactor 1 to mid-2026. The breadth of the range will depend on the success of action plans to be delivered in partnership with contractors, and the impairment test used a mid-range value. A full examination of the benchmark costs and schedule will take place in 2022. A detailed review of the assumptions used in the model for the HPC’s operating phase was conducted in 2021, leading among other things to an update of the very long-term inflation rate applied to electricity prices. The model also takes account of an increase in the UK tax rate, which is set to rise from the current 19% to 25% in April 2023. This change of assumption is applied across the whole lifetime of the model, since no other rate is known, and has a significant impact on the project’s recoverable value. EDF’s projected rate of return (IRR) is now estimated at between 6.8% and 6.9% (compared to 7.1%- 7.2% previously).
Applying this revised basis to the HPC project, and in view of the unfavourable effects explained above, which particularly affect the recoverable value of existing nuclear assets, the headroom between the recoverable value and the book value of EDF Energy shows a moderate decline, but remains significant at 31 December 2021.
The risk of deferral of HPC’s Commercial Operation Date (COD) by 15 months for Unit 1 and 9 months for Unit 2, which would generate a potential additional cost in the region of £0.7 billion (in 2015 sterling) as explained in the Group’s press release of January 2021, could reduce the headroom indicated by the impairment test of EDF Energy by around 34%.
