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Europe’s Big And Expensive Energy Mistake

France plans to renationalize EDF, its giant utility. That doesn’t sound like a big deal because the government already owns 84% of EDF’s outstanding shares. But here is how we read the story. The French government wants to expand nuclear production in France and it also wants EDF to spend big money on the rehabilitation of numerous nuclear power generating stations. It has put pressure on EDF to embrace those policies and we suspect that it could force the issue as the majority shareholder.
But a board of directors, with a fiduciary responsibility to shareholders and other providers of capital, would have a hard time approving a strategy that looked too risky or economically uncompetitive. EDF is, after all, not a division of the ministry of defense, but rather a somewhat privatized company with the government as its biggest and controlling shareholder. At least that is the appearance it would want to give to its shareholders. If France requires more nuclear power for geopolitical or strategic reasons, despite its seeming cost disadvantage in the marketplace, we have no quarrel with that decision. Our issue is with the current policy—to require some non-governmental shareholders to bear national security burdens and take financial risks that really belong uniquely to the government. The French have approached the matter with admirable clarity.  
Germany, taking the almost opposite path, rejected nuclear power in its future after the Fukushima accident, and as a result, became energy dependent on Russian gas instead. One risk was traded for another but not spelled out. A month ago Germany took control of Gazprom Germania, a vital piece of natural gas infrastructure. Now the country faces another problem, the rocketing cost of natural gas that results from the Ukraine war. Germany may have to bail out Uniper, one of Germany’s largest utilities, and even worse, allow utilities to pass on the higher fuel costs to consumers.  We would be curious to see an analysis of the cumulative savings that Germany amassed as a result of contracting for a “cheap” supply of Russian gas as opposed to the astronomical costs of the present situation.  
As an aside, the oil majors plan to sign long term LNG contracts beginning in 2026 (not much help now) with Qatar, the putative Saudi Arabia of LNG.  Presumably much of this new gas would replace Gazprom supplies to Europe. Diversification of supply reduces risk. But is dependence on Qatar necessarily a low risk decision? Dependence on Russian natural gas was once considered a low risk decision too.  
Our point, simply, is that energy infrastructure and supply is a vital component of national security. Ignoring the security aspects of energy policy in order to save money can turn into a big and expensive mistake.  
By Leonard S. Hyman and William I. Tilles
Jul 11, 2022 11:05
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