Restricted access to nuclear energy: the battle has only just begun…
The 2010 NOME Act (New Organization of the Electricity Market) established the so-called Arenh mechanism (regulated access to historic nuclear energy), which, since mid-2011, EDF’s competitors to purchase 100 TWh of nuclear electricity at cost—representing approximately 25% of France’s nuclear production at the time—until 2025.
Boris Solier, University of Montpellier and Jacques Percebois, University of Montpellier
The goal was to enable alternative suppliers—EDF’s competitors—who generated electricity from thermal power (which was more expensive at the time) or who purchased electricity on the wholesale market at a price higher than the cost of nuclear power, to compete with EDF by offering rates close to those of the incumbent operator.
The mechanism has worked well, and all operators agree that it has enabled these new entrants to gain market share. But today, some would like to strengthen it, while others—notably EDF—want to eliminate it.
A factor contributing to price stability
When wholesale market prices collapsed following the decline in thermal power costs and the injection of off-market, privately financed renewable electricity across Europe, new entrants preferred to purchase their electricity on the wholesale market, eschewing the use of the Arenh mechanism. This was particularly the case in 2016. The Arenh is, in a sense, a “free option,” with the potential buyer using this option as they see fit, without any compensation for EDF in the event of withdrawal. At the very least, this option should no longer be free, and the buyer should pay a premium, however modest.
It was not until late 2018 that Arenh’s demand for 2019 exceeded the 100 TWh cap for the first time, due to expectations of rising wholesale prices, forcing the Energy Regulatory Commission (CRE) to reduce everyone’s requests to stay within the volume set by law. The rise in wholesale electricity prices can be attributed to the sharp increase in carbon prices on the European emissions trading market—which jumped from around 8 to 25 euros per ton ofCO2 in a very short time—as well as the rise in oil prices on international markets.
Arenh’s request for 2019 was 133 TWh, and the “new entrants” received only 75% of the requested volume under the so-called pro-rata rule. The situation has worsened in recent weeks, as Arenh’s request for 2020 now stands at 147 TWh, and the CRE was forced to apply the same pro rata rule to reduce the claims of each of the 73 applicants, who thus received only 68% of the volume Arenh had requested.
These new entrants will therefore have to purchase the shortfall on the wholesale electricity market, which is likely to increase the price paid by the end consumer if the wholesale price is, as is likely, higher than the ARENH rate. Existing nuclear power plants, because they are largely depreciated, help stabilize the electricity price paid by the end consumer when electricity prices on the wholesale market tend to rise.
The end of this asymmetric regulation?
EDF’s competitors are calling for the 100 TWh target to be raised to 150 TWh, which would increase Arenh’s share well beyond 25 percent, given that nuclear generation has already been declining and will continue to do so as certain nuclear power plants are scheduled for closure.
An amendment to this effect was passed by Parliament, but the Constitutional Council, which was asked to review the matter by certain senators, expressed reservations in its ruling issued on November 7, 2019. It upheld the mechanism but called for the ARENH price to be revised to reflect changes in the cost of nuclear power. The producer EDF is indeed requesting an increase in the ARENH rate above the price of 42 euros per MWh, which has been in effect since early 2012.
EQRoy/Shutterstock
In a sense, the ARENH mechanism constitutes asymmetric regulation in that it amounts to a form of affirmative action in favor of new entrants. The incumbent operator considers that, with a competitive market price equal to or even lower than the ARENH level, the optional and discretionary use of this mechanism—which is a privilege of EDF’s competitors—has become an unjustified advantage for those competitors, especially since the growing safety requirements imposed by the ASN (French Nuclear Safety Authority) generate additional costs that should, at the very least, lead to an increase in the ARENH level.
Added to this is the fact that nuclear power is often pushed out of the market by renewables, whose marginal cost is close to zero—a situation made possible only because the fixed costs of these renewables continue to be subsidized outside the market. And as the number of new entrants grows, demand for Arenh will increase, further reducing EDF’s market share. The incumbent operator thus finds itself threatened by a “death spiral” as it helps its competitors gradually drive it out of the market.
Should such a system therefore be maintained, or should it be abolished prematurely, given that new entrants now account for more than a third of electricity sales by volume in France?
From Arenh to Aren?
If this mechanism is maintained, it seems fair to simultaneously increase the price of the ARENH to account for the additional costs borne by the incumbent nuclear sector since 2012. The best course of action would undoubtedly be to eliminate it, since competition is now a reality, judging by the market share of new entrants (35%), the sales strength of these entrants (Total, for example), and the number of customers leaving EDF each year (more than 100,000 per month). Finally, we can take this opportunity to kill two birds with one stone by placing nuclear production under the umbrella of a company wholly controlled by the state, whose selling price would be regulated by the public authorities (the CRE in this case).
The volume of the ARENH would thus be increased to 100%, and all electricity suppliers (both EDF and new entrants) would be able to purchase it based on their customer portfolios, with fair allocation criteria applied when demand exceeds supply. The ARENH would become the AREN, as new nuclear power would also be included. This would amount to splitting EDF into two companies: one fully public and regulated, the other partially public and more integrated into market mechanisms.
This appears to be the solution adopted by the government through the “Hercule” project (EDF Bleue and EDF Vert). Some, however, see this as posing a risk of a gradual phase-out of nuclear power (since the public company would be tasked with managing stranded assets—that is, assets rendered obsolete by new legislation), while others see it as a risk of increasing privatization of EDF’s non-nuclear activities. Behind the battle over Arenh, therefore, looms another issue: the restructuring of the French electricity landscape.
Boris Solier, Associate Professor of Economics, Research Associate at Art-Dev and the Chair in Climate Economics, University of Montpellier and Jacques Percebois, Professor Emeritus of Economics, Research Associate at the Chair of Climate Economics (Paris-Dauphine), University of Montpellier
This article is republished from The Conversation under a Creative Commons license. Readthe original article.