[LUM#19] “Opening up the electricity sector to competition comes at a high price”
How and by whom are electricity prices set? What is a regulated sales tariff? An electricity market? Why have prices risen so sharply? François Mirabel, a researcher at Montpellier Research Économie (MRE), explains the economic model of electricity in France and its recent developments.
Who sets the price of electricity in France?
F. M.: The electricity sector is a public service of an industrial and commercial nature. Historically, in France and in most countries, the state has taken control of this market and created a monopoly for the production, transmission, and supply of electricity. The price paid by customers took the form of a regulated sales tariff (TRVE) set by the government to enable the monopoly company (in France, EDF) to cover its electricity supply costs.
Why was a regulated tariff introduced?
F. M.: Because it is a public service. Electricity supply must be universal and equal for everyone who requests it, wherever they are in France, with an "affordable tariff" set. We have therefore introduced a regulated electricity sales tariff with spatial tariff equalization, just like for postage stamps!
You speak of it in the past tense; does this regulated rate no longer exist?
F. M.: With the opening up of the market to competition, the regulated sales tariff has gradually disappeared. It now only exists for residential customers and is calculated using a "stacking" method. Instead of being set according to EDF's costs, it is partly based on the supply costs of competitors who source their electricity from the market. To put it simply, this allows EDF's competitors to be competitive (this is referred to as the "contestability" of TRVEs), but above all, it has contributed to an increase in the regulated sales tariff. (Analysis: The opening up of the market to competition in Europe at the root of soaring electricity prices, The Conversation, September 20, 2022).
When did competition begin?
F. M.: It was a 1996 electricity directive, which was transposed into French national law in 2000. It initially applied to businesses, then to individuals in 2007. But it was mainly the European Treaty of Rome in 1957 that triggered this opening up to competition through its Article 90 §2: "all undertakings entrusted with tasks of general economic interest shall be subject to the rules of competition." This concerns the electricity sector, the gas sector, the postal service, telecommunications, air transport, rail transport, etc.
Why has opening up the market to competition led to this increase in prices?
F. M.: Most suppliers are not electricity producers, so they have to buy it. With the opening up of the market to competition, EDF was required to make a quarter of its nuclear production (100 TWh/year) available to competing suppliers at the regulated price of €42/MWh. This is known asARENH (Regulated Access to Historic Nuclear Electricity). Obviously, this is not enough to cover all the needs of suppliers, who are also obliged to source electricity on the market. And in a market, by definition, prices fluctuate according to supply and demand!
EDF has to sell its production to its competitors, who then resell it to their customers, is that right?
F. M.: Yes, in economics, this is called "double margin," and it doesn't lower prices! Clearly, ARENH was a way of sharing EDF's very high profits, as it was selling its electricity at a much higher price than its cost! But let's not forget that EDF is owned by the state, and it's not shocking that the state can make profits that can then be redistributed for social policies, for example.
Despite this "double margin," were some suppliers able to offer very attractive deals?
F. M.: Yes, we saw attractive deals come in with market rates below the TRVE. However, these rates were mostly variable rates, which ultimately led to crazy increases that could reach sky-high levels!
What is causing these increases?
F. M.: Electricity cannot be stored on a large scale, which means that supply and demand must be balanced in real time, even though we are dependent on external factors: a cold snap causes demand to skyrocket, and so do prices. Investments must be planned to ensure capacity margins and therefore continuity of service even in the event of consumption peaks. Today, these margins no longer exist because the market is organized on a short-term basis and does not offer sufficient clarity and price stability to invest and thus guarantee strong capacities.
Was the war in Ukraine also mentioned as a reason for the price increase?
F. M.: Yes, the surge in gas prices linked to the war in Ukraine, but also the water shortage in dams, the shutdown of nuclear reactors... All these economic factors have created scarcity, and in a market where there is a shortage of supply and high demand, prices skyrocket! This is how a market normally works, but it is not acceptable in the electricity sector.
Why?
F. M.: Because we are dealing with an essential need for captive use with no possible substitute. A market signals the scarcity of a good by increasing its cost. I don't mind that strawberries cost €10 per kilo in December; people can eat apples instead. But with electricity, what is the substitute? Do we want people to light a fire in the garden to warm their hands?
And public aid policies are not enough?
F. M.: Energy vouchers and mobility vouchers are being offered as compensation, but these are just stopgap measures to compensate for market failures. The European Union is proposing minor reforms, but it is clear that the only real reform would be to return to a highly centralized system.
And what is stopping this?
F. M.: It is clearly not possible to return to monopolies under European competition rules. The tragedy is that we have created electricity markets without giving ourselves the means to have a genuine European energy policy to plan long-term investments and "think" about an energy Europe that is efficient and concerned with missions of general economic interest! We know that opening up the electricity sector to competition comes at a very high price, and this is not only due to the conflict with Ukraine. We must be honest about this!
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