Regulated access to nuclear energy: the battle has only just begun...
The 2010 NOME law (Nouvelle Organisation du Marché de l'Électricité - New Organization of the Electricity Market) introduced the Arenh mechanism (regulated access to historical nuclear energy) which, since mid-2011, has enabled EDF's competitors to purchase 100 TWh of nuclear electricity at cost price, i.e. around 25% of French nuclear production at the time, until 2025.
Boris Solier, University of Montpellier and Jacques Percebois, University of Montpellier
The aim was to enable alternative suppliers, EDF's competitors, who produced thermal electricity, which was more expensive at the time, or who bought electricity on the wholesale market at a price higher than the cost of nuclear power, to compete with EDF by offering prices close to those of the incumbent operator.
The mechanism has worked well, and all operators consider that it has enabled these new entrants to gain market share. But today, some would like to strengthen it, while others, notably EDF, would like to abolish it.
A factor of price stability
When wholesale market prices collapsed as a result of falling thermal electricity costs and the injection of off-market financed renewable electricity across Europe, new entrants preferred to purchase their electricity on the wholesale market, abandoning the use of Arenh. This was particularly the case in 2016. Arenh is a kind of "free option", with potential buyers using it as they see fit, with no compensation for EDF in the event of renunciation. At the very least, this option should no longer be free and the buyer should pay a premium, however modest.
It was only at the end of 2018 that Arenh demand for 2019 exceeded the 100 TWh ceiling for the first time, due to an upward anticipation of wholesale prices, forcing the Commission de Régulation de l'Energie (CRE) to reduce everyone's requests in order to stay within the volume stipulated by law. The rise in electricity prices on the wholesale market can be explained by the sharp increase in the price of carbon on the European allowances market, which has risen from around 8 to 25 euros per tonne ofCO2 in a very short space of time, and by the rise in oil prices on international markets.
The Arenh demand for 2019 was 133 TWh, and the "entrants" only obtained 75% of the desired volume under the so-called pro rata rule. Things have got worse in recent weeks, as Arenh demand for 2020 has now reached 147 TWh, and CRE has been forced to use the same pro rata rule to reduce the claims of each of the 73 applicants, who have thus obtained only 68% of the Arenh volume requested.
These new entrants will therefore have to purchase the remainder on the wholesale electricity market, which should increase the price paid by the end consumer if this wholesale price is, as is likely, higher than the Arenh level. Because it is largely amortized, historical nuclear power is a factor of stability in the price of electricity paid by the end consumer when electricity prices observed on the wholesale market tend to rise.
The end of asymmetric regulation?
EDF's competitors are calling for the 100 TWh volume to be increased to 150 TWh, which would mean increasing Arenh's share well beyond 25%, since nuclear generation is already and will increasingly be declining in volume due to the scheduled closure of certain nuclear power plants.
An amendment to this effect was passed in parliament, but the Constitutional Council, to which certain senators had referred the matter, expressed reservations when it issued its ruling on November 7, 2019. It justifies the mechanism, but calls for the Arenh price to be revised to take account of changes in the cost of nuclear power. Producer EDF is in fact calling for the level of Arenh to be upgraded beyond the price of 42 euros per MWh, which has been the price in force since early 2012.
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In a way, the Arenh mechanism constitutes asymmetrical regulation in that it amounts to a form of positive discrimination 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 in favor of these competitors, all the more so as the growing safety constraints imposed by the ASN (French nuclear safety authority) are generating additional costs that should lead, at the very least, to an increase in the Arenh level.
This is only possible because the fixed costs of these renewables remain subsidized outside the market. And as the number of new entrants grows, so will demand for Arenh, reducing EDF's market share. The incumbent is thus threatened with a "death spiral", as it helps its competitors to gradually drive it out of the market.
Should we maintain such a system or abolish it before its time, bearing in mind that new entrants now account for more than a third of electricity sales volume in France?
From Arenh to Aren?
If we maintain this mechanism, it seems fair to simultaneously increase the Arenh price to reflect the additional costs incurred by historical nuclear power since 2012. The best thing would probably be to abolish it, since competition is now a reality, judging by the market share of new entrants (35%), the sales force of these entrants (Total, for example), and the number of customers leaving EDF every year (over 100,000 per month). Finally, we could take advantage of this opportunity to kill two birds with one stone by safeguarding nuclear production in a company wholly controlled by the State, whose selling price would be regulated by the public authorities (in this case, the CRE).
The volume of Arenh would thus be increased to 100%, and all electricity suppliers (EDF and new entrants alike) would be able to acquire Arenh according to their customer portfolio, with equitable distribution keys when demand outstrips supply. Arenh would become Aren, as new nuclear power would also be concerned. This would mean splitting EDF into two companies, one fully public and regulated, the other partially public and more integrated into market mechanisms.
This seems to be the solution chosen by the public authorities with the "Hercule" project (EDF bleue and EDF vert). However, some see in this a risk of a gradual phase-out of nuclear power (with the public company responsible for managing stranded assets, i.e. those rendered obsolete by new legislation), while others see a risk of increasing privatization of EDF's non-nuclear activities. Behind the Arenh battle lies another challenge, that of restructuring the French electricity landscape.
Boris Solier, Senior Lecturer in Economics, Associate Researcher at Art-Dev and Climate Economics Chair, University of Montpellier and Jacques Percebois, Professor Emeritus in Economics, Associate Researcher at the Climate Economics Chair (Paris-Dauphine), University of Montpellier
This article is republished from The Conversation under a Creative Commons license. Read theoriginal article.