Will Areva survive a cascade of crises?

Phillippe Knoche, Areva’s CEO, at this point in his brief history at the head of the firm, could probably be forgiven for thinking that without too much trouble he could throw a rock in just about any direction and hear the clang of its impact on side of one of the firm’s major crisis. The past month has seen them pop up like a string of volcanic islands rising from the ocean their heat driven by the friction of the intersection of massive tectonic plates.

Areva’s troubles look like that because the firm’s financial crisis is growing due to forces that appear to be beyond its control.

Too much carbon not enough steel

General layout of an Areva EPR

General layout of an Areva EPR

The most significant piece of bad news is that in early April the French nuclear safety agency ASN released a report that problems had been found with the steel in the reactor vessel head and other components of the reactor pressure vessels (RPVs) installed at one unit  at Flammaville, France, and two units at Taishan, China.

The announcement was made all the more significant by the fact that the head of ASN, Pierre-Franck Chevet, described the problem as “very serious.” He described it as an issue with too much carbon in steel parts of the very large forgings manufactured at Areva’s Le Creusot facility.

The ramifications tumbled down like an avalanche in the French Alps. The Chinese government immediately announced that no fuel would be loaded in either unit at Traishan until the issue was resolved either by further tests or other measures. In the UK, where two Areva EPRs are planned to be built at the Hinkley Point site, the government asked whether it should reconsider its choice of this design.

For its part, EDF, which is building the unit at Flamanville, and will build the EPRs at Hinkley Point, said it was disputing ASN’s findings. The firm said the reactor pressure vessel components are “compliant” with the mechanical standards for them. French Energy Secretary Segolene Royal said that further tests are needed and that a final finding may not be available until next October.

In the meantime, Areva’s problems with its forge may put more work into Japan Steel Works. It may finally push the UK into significantly investing in Forgemasters to develop the capability to make RPV castings and certainly will convince India to develop its heavy industry firms to do the same.

The US has no large forgings facility and, aside from one firm that is pursuing commercial development of small modular reactors, will see little demand for them domestically for at least the next decade or longer.

The primary reason is record low prices of natural gas is driving investors to build 700 MW gas fired plants to enter revenue service in just three-four years and at less than 20% of the cost of a nuclear plant with the same generating capacity. For publicly traded utilities with investor demands for return on capital, especially in deregulated markets, the outlook for new US nuclear projects is dim at best.

Areva at one time was positioned to build four EPRs in the US. Work on all of them has been suspended or cancelled, and the firm stopped work at the NRC to complete the design review for the EPR reactor.

Who wants a piece of Areva?

Both Areva and EDF are state-owned corporations which exist as creations of the government. Yet, in some ways they operate very much like firms that exists outside the realm of policy decisions.  Given Areva’s deepening debt crisis, the  French government has put forward the idea that the two firms should be merged into one giant nuclear conglomerate.

This idea has not gone over well with either firm with a volley of differences shuttled back and forth in the news media about valuation of various parts of the business units involved. A long history of personal animosity at the CEO level hasn’t help matters.

One scenario that rises to the top more often in the heated debates is one in which EDF will take over all of Areva’s reactor projects. It would spin off Areva’s nuclear fuel activities which  include uranium mining, enrichment, fuel fabrication, and spent fuel reprocessing.

It will take months for the EDF / Areva dance to result in some kind of new partnership,. A key issue for the French government is how much it will put into that new arrangement in terms of fresh capital. Areva’s huge financial liabilities for delays at a reactor project in Finland would not be part of the merger.

China comes knocking

The Chinese state nuclear firm China National Nuclear Corp. (CNNC) said this week it is open to an alliance, partnership, or role as an investor with Areva specifically for the Hinkley Point project in the UK.  CNNC is already partnered with another state owned firm, China General Nuclear Corp. (CGN) in an investor role at Hinkley Point.

But the Chinese firms want more than just a passive investor role in the UK. They want two other things from Areva. The first is transfer of technology in terms of reactor design, something they got from Westinghouse but not from the French, for mainland China projects. Second, both firms want to take over Areva’s lucrative reactor services and maintenance contractors which would give them access to customers worldwide including in the US.

France might welcome Chinese investor roles in reactor projects. It is unclear how far it would go in giving up a share in one of the few cash cows remaining in Areva’s portfolio.

Implications for the nuclear industry

Areva’s rapid and unprecedented collapse from being the king of the hill in terms of western nations building nuclear reactors to becoming a financial basket case is strengthening the hand of anti-nuclear forces in Germany, Switzerland, and Sweden. One the other hand, there is no other source of carbon emission free base load electrical generation capacity that can push 1000 MW on to the grid for 18-24 months at a time with 98% reliability.

France’s problems with Areva are really the planet’s problems because nuclear energy has an important role to play in reducing greenhouse gas emissions. How well Areva plays with others will have consequences far beyond the margins of its next financial statement.

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About djysrv

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