The discount rates used in impairment testing are substantially higher than at 31 December 2021 for all countries where the Group has operations, with increases of 100-130 base points in its four principal countries (France, the United Kingdom, Italy, Belgium). This increase was driven by the rise in risk-free rates.
The impairment test results are also analysed for sensitivity to the discount rate.
The higher WACC was the primary factor driving recognition of impairment of €(1,176 million) on the goodwill of EDF Energy at 31 December 2022.
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.
At 31 December 2022, the Group has practically no remaining coal-fired or gas-fired operations in the United Kingdom.
In 2022, the Sales and Supply segment was affected by the United Kingdom’s energy market crisis, as it was unable to pass on the total increase in its sourcing costs to consumers, even though the cap on the Standard Variable Tariff (SVT) for domestic customers was raised successively by 54% in April, then 80% in October. In the end, the energy price crisis led the Department for Business, Energy & Industrial Strategy (BEIS) to launch an Energy Price Guarantee to protect consumers from the full impact of the rise in unit tariffs: the government will bear that cost above a threshold (currently set at £2,500 a year, but due to rise to £3,000 for the period 1 April 2023 – 1 April 2024). A similar mechanism, the Energy Bill Relief Scheme, exists for BtoB consumers, but it covers more complex tariffs associated with that market and is scheduled to end on 31 March 2023. Domestic consumers in the United Kingdom have also benefited from other financial support from the government, including the Energy Bills Support Scheme providing a £400 discount to help consumers with their energy bills. The support measures introduced, principally funded by the State budget, thus had limited effects on the profitability of the Sales and Supply segment. Market shares were stable, with a lower churn rate in 2022.
The recoverable value of the Sales and Supply segment is higher than in 2021 due to an improvement in EBITDA over the MTP horizon for BtoC activities in particular, driven by a catch-up effect resulting from the energy crisis, because the SVTs used to set contract prices have been updated. This effect is mitigated by the increase in the WACC. In the long term, profit margin prospects are confirmed for the BtoB and BtoC activities and this segment remains relatively insensitive to price scenarios as wholesale energy costs are generally passed on to consumers over time.
Sensitivity analyses were conducted with major reductions in long-term margin rates and losses of market share. These analyses showed that this CGU is sensitive to these parameters, especially as it has few fixed assets (mainly information systems).
The recoverable value of EDF Energy’s nuclear assets in operation is determined by discounting future cash flows over the assets’ useful life. This year saw the end of generation at Hunterston on 7 January 2022 and Hinkley Point B on 6 July 2022 (R4) and 1 August 2022 (R3), in accordance with the announcements made by the Group on 27 August 2020 and 19 November 2020 respectively. At 31 December 2022, the Nuclear assets CGU includes the Sizewell B PWR plant, assuming that it will remain in operation until 2055, the Torness and Heysham 2 AGR plants following the decision made in December 2021 to bring their estimated end of operations forward to March 2028, and the two AGR plants at Hartlepool and Heysham 1, which are scheduled to cease operations in 2024.
The prospects of a significant rise in forward market prices, even beyond the medium-term horizon, are partly mitigated by the new Electricity Generator Levy on low-carbon electricity producers introduced by the British Government (45% on revenues above £75/MWh between January 2023 and March 2028), and the increase in the WACC. The test results confirm the durable rise in headroom, which is higher than in 2021. Consequently €400 million was recovered from the impairment previously booked in June 2020 following generation difficulties and a significant drop in market prices. New impairment of €120 million was also recognised in respect of individual assets (non-operating land close to nuclear plants).
The recoverable value of nuclear assets in operation is sensitive to price assumptions: all other things being equal, a +/-5% difference over the entire horizon of the scenario used for the impairment test would have an impact of +/- £500 million on the test result. The nuclear output assumptions used also have a substantial influence on the calculation: all other things being equal, a +/-5% revision to forecasts over the entire horizon would result in a variation of +/-£700 million in the recoverable value. In addition, a 50bp increase in the discount rate would lead to a decrease of around £200 million in the recoverable value. Taken individually, none of these sensitivities is likely to generate a risk of impairment, all other things being equal.
EDF Energy’s gross goodwill amounted to €7.7 billion (or £6.8 billion including Podpoint) at 31 December 2022 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. 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 the 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 WACC determined for HPC is a hybrid rate that reflects the specificity of the cash flows being regulated by the CfD for 35 years, then exposed to market prices for the 25 subsequent years. The rate applicable to the project is 6.7% at 31 December 2022, 100bp higher than the 5.7% used in 2021. The WACC used to test EDF Energy goodwill takes account of the WACC applicable to each of the company’s CGUs (HPC, Nuclear assets (plants in operation), Sales and Supply). Given the respective importance of cash flows from each CGU, the overall WACC for EDF Energy is also 6.7% at 31 December 2022, after 5.7% at 31 December 2021.
On 19 May 2022 the Group released a review of the schedule and cost for construction of the two nuclear reactors at Hinkley Point C. This review was conducted to update the project assumptions, notably due to the impact of Covid-19 restrictions and Brexit on the supply chain, and the challenges facing both operators and personnel as regards resources (see the Group press release of 19 May 2022, and note 10.6).
The start of electricity generation by Unit 1 is now expected in June 2027 instead of June 2026 as previously (and June 2028 instead of June 2027 for Unit 2). The project completion costs are now estimated in the range of £25-£26 billion (in 2015 sterling), as opposed to the previous estimate of £22 - £23 billion (in 2015 sterling).
This announcement also reported the risk of a further 15-month deferral of the commissioning date, resulting in a lower recoverable value estimated at £2.5 billion that was integrated into the project model.
In the financial statements at 30 June 2022, based on the WACC of 6% at that date (versus 5.7% at 31 December 2021), the Group stated that after taking this risk into consideration, the threshold of the goodwill impairment test would be reached if the discount rate was increased by 15bp, and the threshold of the impairment test of the HPC CGU would be reached if the discount rate was increased by 50bp, all other things being equal.
