Electricite de France SA, also known as EDF, is a state-owned electric utility company that the French government has instructed to sell power at a steep discount versus market prices to shield households from soaring electricity prices.
The unprecedented decision could cost EDF $8.8 billion. Shares in the utility crashed as much as 25% (most on record) on the news and were trading -16% around 8.70 euros (as of 0640 ET).
Francois Breton, a fund manager at Edmond de Rothschild Asset Management, told Bloomberg that EDF is "the first victim" of the country's upcoming presidential elections in April. French President Emmanuel Macron is relatively unpopular, and the move to counter energy inflation by capping power bills is his attempt to win the support of households.
JPMorgan said the utility might have to raise capital on secondary markets to mitigate losses of selling discounted power.
It's "from heaven to hell" for EDF, with a tariff intervention, outages, and imminent capital increase, JPM commodity analysts wrote in a Friday note. The analysts said to avoid dip buying in the utility until the smoke settles.
In other developments, EDF announced Thursday that several of its nuclear power plants would remain offline for longer than expected due to repairs. The shutdown will slash electricity output from reactors by 8%. Last month, multiple nuclear power plants went offline due to cracks in one reactor.
Like many other European countries, France has been grappling with an energy crunch. The cap will only allow electricity bills for households to rise about 4% this year. The government is also slashing taxes on electricity worth around 8 billion euros to lower prices.
Macron's attempt to curb household inflation is a political move at the expense of a state company to improve his prospects for the presidential elections in April.
We see a longer-term headwind for European utilities as the energy crunch on the fuel-starved continent shows no signs of abating as politicians are eager to do anything in their power to protect households from soaring electricity prices.