The French government Monday agreed to pay state-controlled power utility Electricite de France SA €4.9 billion ($6.57 billion) to cover subsidies related to green energy and the poor, eliminating a key area of financial uncertainty for investors, reports The Wall Street Journal.
The move lifted EDF's shares by about 5%, although the company still faces considerable pressures in its home market because of caps on the price it can charge customers for its electricity and costs stemming from a government move to close down some of its nuclear-power plants. To deal with these problems, the company plans to unveil cost-cutting measures next month, which could scale back some overseas investments.
The French government began levying a special tax, called Contribution to the Public Service of Electricity, in 2003 on the bills of electricity consumers. The tax was designed to fund losses incurred by EDF from selling at market prices electricity from producers that generate power from renewable sources at a higher price. The tax was also intended to fund cuts to electricity tariffs for the poor and to guarantee consumers in remote areas—including French islands in the Atlantic and Pacific oceans—pay the same tariffs as users in continental France.
However, since 2007 revenue from the tax hasn't kept pace with the rising cost of keeping bills lower for poorer and more remote customers, leaving EDF to fund the difference.
EDF estimates the deficit to be about €4.3 billion, plus an estimated €600 million in financial costs.
In recent years, the company has insisted that the government should acknowledge the debt and raise electricity tariffs to allow it to fund the increased spending.
The French government is caught in a difficult situation as its pledge to defend households' spending power conflicts with the intention to boost renewable energies, which will raise the cost of electricity generation.
Read more of this report from The Wall Street Journal.