"Opening up competition in the electricity sector 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, researcher at Montpellier Research en Économie(MRE), deciphers the economic model of electricity in France and its recent evolution.

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 other countries, the State took control of this market and created a monopoly to produce, transport and supply electricity. The tariff paid by customers took the form of a regulated sales tariff (TRVE) set by the State to enable the monopoly company (in France, EDF) to cover its electricity supply costs.

Why did you introduce a regulated tariff?
F. M.: Because electricity is a public service. The supply of electricity must be universal and equal for anyone who requests it, wherever they are in France, with the setting of an "affordable tariff". So we set up a regulated tariff for the sale of electricity, with spatial equalization of tariffs, just like for postage stamps!

You're talking in the past tense - the regulated tariff no longer exists?
F. M. : With the opening up to competition, the regulated sales tariff has gradually disappeared. It now exists only for residential customers, and is calculated using a method known as "stacking". Instead of being set on the basis of EDF's costs, it is based in part on the supply costs of competitors sourcing on the electricity market. To put it simply: this allows EDF's competitors to be competitive (this is known as the "contestability" of the TRVEs), but above all it has contributed to an increase in the regulated sales tariff. (Décryptage: L'ouverture à la concurrence en Europe aux racines de la flambée des prix de l'électricité, The Conversation, 20/09/2022).

When was the opening up to competition introduced?
F. M. : The 1996 electricity directive was transposed into French law in 2000. It first concerned professional customers, then private customers in 2007. But it was above all the European Treaty of Rome in 1957 that triggered this opening up to competition, through its article 90 §2: "all undertakings entrusted with missions of general economic interest shall be subject to the rules of competition". This applies to the electricity and gas sectors, the post office, telecoms, air and rail transport, etc.

Why has opening up to competition led to this rise in rates?
F. M. : Most suppliers don't produce electricity, so they have to buy it. With the opening to competition, EDF was obliged 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 (Accès Régulé à l'Électricité Nucléaire Historique). Obviously, this is not enough to cover all the needs of suppliers, who are also obliged to obtain supplies on the electricity market. And on a market, by definition, prices fluctuate according to supply and demand!

EDF has to resell its production to its competitors, who in turn resell it to their customers, right?
F. M.: Yes, in economics we call that a "double margin", and it doesn't lower prices! Clearly, the ARENH was a way of sharing EDF's very high rent, which was selling electricity at a much higher price than it cost! But let's not forget that EDF is the State, and it's not shocking that the State can make rents that can then be redistributed for social policies, for example.

Despite this "double margin", some suppliers have been able to come up with very attractive offers?
F. M. : Yes, there were attractive offers with market rates lower than the TRVE. It's just that these rates were most often variable rates, with the result that the increases could be staggering!

What are these increases due to?
F. M. : Electricity can't be stored on a large scale, which means that supply and demand have to be balanced in real time, whereas we depend on exogenous phenomena: a cold snap and demand explodes, driving up prices. Investment planning is needed 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.

Has the war in Ukraine also been mentioned as a reason for the rise in prices?
F. M. : Yes, the surge in gas prices linked to the war in Ukraine, but also the lack of water in dams, the shutdown of nuclear reactors... All these short-term factors have created scarcity, and in a market, when there's a shortage of supply and there's a lot of demand, prices explode! That's the way a market works, and it's not acceptable in the electricity sector.

Why?
F. M. : Because we're dealing with an essential need for captive use, with no possible substitution. A market signals the scarcity of a good by increasing its cost. I don't mind if strawberries cost €10 a kilo in December, because people will be able to eat apples. But with electricity, what's the substitution? Maybe we want people to light a fire in the garden to warm their hands?

And aren't public assistance policies sufficient?
F. M. : We're proposing energy or mobility vouchers to compensate, but they're just patches to make up for market malfunctions. The European Union is proposing some small reforms, but it's clear that the only real reform would be to return to a highly centralized system.

And what's stopping it?
F. M. : It's 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" an efficient Europe of energy, mindful of missions of general economic interest! We know that opening up the electricity sector to competition is very costly, and this is not only due to the conflict with Ukraine, we must be honest enough to say!