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The French Dispatch - A newsletter from Paris

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While Europe is facing an unprecedented energy crisis, France is implementing contingency measures to allow businesses and consumers to weather the storm by: ​

  • ​Requiring that gas stocks be filled to the maximum, with the objective of “being close to 100%” by end of summer*. ​

  • ​Implementing a households’ purchasing power act including energy sovereignty measures and the review of the ARENH’s parameters (which regulate access to historical nuclear energy), with an increase in volume (20TWh) and of the minimum price (49,50€/MWh).​

  • Reducing the overall energy consumption by 10% within the next two years.​

Standing at a crossroad, France is working on implementing an ambitious and much needed energy transition:​

  • Following a heated summer and amid a deep energy crisis, energy will dominate the parliamentary discussion over the coming months. An exceptional bill to accelerate renewables is expected this autumn and will include key reforms on sharing value creation from renewable energy, speeding up regulatory proceedings, land release and strategic planning.​

  • Regarding nuclear power, the government’s priority will be to ensure the return to service of those nuclear reactors previously halted for maintenance as well as to plan the launch of the construction program for the new generation of nuclear fleet: six new-generation EPR reactors.

*Source : Prime Minister Elisabeth Borne’s speech at the “Rencontre des Entrepreneurs de France” on 29/09/2022

Main features of the French energy market

1. Continued dominance of nuclear power for electricity production​

The French electricity market is and has been historically dominated by the nuclear production which, in 2021*, accounted for 69% of the national production. This is the result of key decisions taken in the 1960-70s to improve the balance of energy imports, with cheap, abundant, carbon-low and drivable energy sources. This was a winning bet during the oil crises of the 1970s. ​

The landscape has evolved over the last few years, following the Fukushima disaster in March 2011, with a steady - although rather slow - growth of the renewable sources and a decrease in the share of nuclear (it was between 75% to 80% more than a decade ago). Yet the urgency to curb emissions, compounded by the Russian war against Ukraine and the cut in Russian gas imports, has rekindled the importance of energy sovereignty. Notably for France this has highlighted the importance of nuclear energy and the need to revive their, until recently, shrinking industrial production.​

2. Heavy dependency on fossil-fuel imports​

Historically, France has always been highly dependent on fossil fuel imports (especially on oil and gas), as mainland resources are very low and often not used. Yet, it generally accounts for around half of the primary energy consumption per year in France.​

3. A historical model, structured around single supplier dominance (EDF) and EU competition concerns​

After WWII, France nationalized all means of electricity production and gave all assets to Electricité de France (EDF), which was tasked with financing new means of production. This move was part of a strategy granting the state a critical role organizing and planning for France’s critical economic sectors. As a result, the company owns a large part of the existing energy infrastructure in the country. ​

One of the key regulatory measures to compensate for the quasi-monopolistic position of EDF is the establishment of a principle of “equalization”. Under this principle, prices should be irrelevant of geographical disparities including for territories overseas and the guarantee of low tariffs for business and the industry.​

However, with the energy market becoming part of the of the European internal market in the 1990s, such a model has been heavily challenged by EU institutions, based on competition concerns. To avoid the threat of a dismantlement of EDF, France struck a deal with the European Commission in 2010 to create an instrument called “ARENH” (for regulated access to historical nuclear energy) to foster competition on both production and distribution segments until 2025. ​

The aim is to prompt EDF (which was in the meantime partially privatized) to provide alternative distributors, with a share of its production at a fix price reflecting mere production costs.​

In such a context, and with growing political pressure over the need to reduce the dominance of nuclear in France, a stagnant energy market has prevailed where there has been no clear direction taken for around 25 years, undermining the country’s sovereignty and energy transition.​

4. Challenges for energy transition

Considering its commitments to tackle climate change, the French Government has taken new steps in planning the country’s energy transition, to ensure security of supply, reinforce energy sovereignty and reduce GHG emissions. However, the process faces several challenges: delays in the commissioning of next-generation nuclear reactors and an ageing nuclear fleet leading to critical operational issues, administrative burden, and social resistance to the deployment of renewable energies infrastructures. In fact, France is the only European country not matching its European renewable energy targets; only 19% of its final energy consumption originate from renewable energy sources, far from its 23% target.

To meet these challenges in 2019, EDF, at the request of the Government, designed a restructuring project, codenamed “Hercule”, which would split the group into three entities: a public one “Blue” for nuclear powerplants, a listed one “Green” for distribution, sale and renewable production, and “Azur”, which would manage hydroelectric concessions.

In summer 2021, the government suspended the restructuring project. After the 2022 presidential elections, the newly appointed Prime Minister Elisabeth Borne announced the renationalization of EDF. This should allow the highly indebted company to borrow at moderate cost whilst avoiding the exposure to market tremors and granting the government extensive control over the whole restructure. The group requires heavy investment, in renewables but also for its “new nuclear” fleet (six to fourteen EPR reactors are planned). The most likely scenario is the relaunch of an EDF restructuring plan, which should be simpler with a nationalized EDF.

All these discussions are tied to the ongoing negotiations with the EU Commission regarding the status quo for post-2025, when ARENH comes to an end and to the potential competition issues that this could cause. As the ARENH system will be revamped in 2025, critical uncertainties are hanging upon the current system. The French Government will need to strike a working compromise with the Commission regarding the future legal format for the system. Currently two measures are being envisaged which are either a tailored state aid scheme, or the recognition of nuclear energy as a Service of General Interest, allowing for a targeted compensation.

They will also depend upon the possibility to strike compromises in a divided political landscape where the Government can only rely on the support of a hung parliament.

Renewable energy represented 19% of the gross energy consumption in France. Well below the 23% they should have reached, according to a European directive of 2009.

* Source : https://bilan-electrique-2021.rtefrance.com/synthese-les-faits-marquants-de-2021/

Recent developments in light of the energy crisis

The current situation of energy uncertainty in France is driven by two crises of unprecedented magnitude:

  • A looming energy crisis as Europe heads into winter with potentially insufficient gas supply.

  • A significant number of France’s nuclear reactors that are currently halted or operating at limited capacity due to maintenance issues and high temperatures, weakening the ability to cool the reactors.

As a result, energy prices have been skyrocketing as concerns grow over the risk of energy shortages during the upcoming winter.

"Let's make no mistake: saving energy increases purchasing power and also reduces greenhouse gas emissions".

Opinion piece "Energy prices threaten our cohesion", top managers of Engie, EDF and TotalEnergies in a joint op-ed published in “Le Journal du Dimanche” on 25.06.2022

Measures planned by the Government

1. Reducing the overall energy consumption by 10% within the next two years

To achieve a 10% reduction in the overall energy consumption, the French government has launched seven working groups:

  • The Exemplary State*

  • Companies and the organization of work.

  • Establishments open to the public and large commercial areas.

  • Local authorities.

  • Digital and Telecommunications.

  • Sport events.

  • Housing

Stakeholders will be invited to provide roadmaps with simple and operational recommendations to achieve the 10% reduction target. The results of the consultation, as well as the proposals for operational measures, should be made public at the end of September / beginning of October (Energy efficiency plan).

2. Emergency plan in the event of an energy supply disruption

French government is working on an emergency plan to tackle the insufficient electricity and gas supply in the French market. Contrary to Germany, who activated the level 2 of its gas emergency plan at the end of June, an alert level has not been activated in France yet given France is expected to present its emergency plan in the autumn.

Unlike Germany, France’s vulnerability lies more in electricity rather than the gas supply, given lower dependency on Russian gas. France’s electrical fragility is linked to its nuclear park and in particular to maintenance issues with nuclear plants, the age of its nuclear fleet and corrosion issues, which led to the temporary shut down of numerous nuclear plants.

"International tensions as well as the unavailability of a part of the French nuclear park impose on us an unprecedented effort in terms of energy savings"

Elisabeth Borne, Prime Minister, in a communiqué addressed to her ministers on 27.07.2022

France’s Minister for the Energy Transition, Agnès Pannier-Runacher indicated that interrupting gas flow or installations is not a possibility for security reasons as it requires specialised teams and skills. However, to avoid a generalized blackout, the government is working on the set-up of a four-step contingency plan, that goes from restraint to rationing:

I. Energy savings: this involves a 10% reduction in our energy consumption.

II. Subscribing to the system of load shedding and interruptibility: signing a contract with network operators and undertaking to stop or reduce part of equipment or production for a few minutes or hours at the time of peak energy consumption, in exchange for financial compensation.

III. Lowering the voltage of the power grid, which is specific to electricity.

IV. Carrying out occasional power cuts: with businesses being the first to be affected by rationing measures.

3. France now requires that gas stocks be filled to the maximum, with the objective of “being close to 100%” at the end of summer 2022.

Operators were previously required to fill storage capacities up to 85% only, by 1st November. Storage operators are also required to buy gas, in addition to the purchases already bought by gas suppliers. These storage companies benefit from a public "financial guarantee" scheme.

4. A law to allow households and businesses to weather the storm and includes:

− A chapter that aims at reinforcing the security of gas supplies.

− A second chapter including provisions related to the security of electricity supplies, to allow the relaunch of coal powerplant set to be closed.

− The third chapter reviews ARENH’s parameters:

  • Confirmation and retroactive validation of the 20 TWh increase in volume - decided last April - with a new fix ceiling set at 120TWh/year (instead of 100TWh/year).

  • A minimum price applicable to all volumes has been set at 49,50€/MWh, well above the one currently in force (42€ for the initial 100 TWh and 46,20€ for the additional 20 TWh). However, the implementation is pending validation by the EU Commission. The authorisation process lasts on average two months. It can take longer if the Commission decides that, based on doubts related to the compatibility with EU state aid regulations, a formal investigation must be launched.

Latest developments at the end of August

  • All companies are invited to set up their own energy efficiency plan in September.

  • The government is working on an “energy consumption trading market”, that would be similar to the EU’s Emissions Trading System.

  • The French government is strongly advocating at EU level for the revision of the current system of the European energy market so that the price of electricity is no longer aligned with that of gas.

  • Considerations about the ecological transition will be a central criterion for the governmental supporting policy towards investments.

  • President Macron has convened a defense council on Friday 2 September to discuss France’s gas and electricity supplies, and the scenarios considered to prepare for this winter.

“We are increasing our gas storages and they will be 100% full at the end of the summer.”

Prime Minister Elisabeth Borne, in a speech given at “La Rencontre des Entrepreneurs de France” (La REF), 29.08.2022

* The Prime Minister has invited her entire government and its administrative services to set an example in terms of energy sobriety. They are asked to reduce their energy consumption and their dependence on fossil fuels by applying common sense measures.

Next steps: Implementing the energy transition based on renewables and nuclear power

Bill on renewables expected in September

The Government intends to present a bill in Parliament that, if passed, would bolster the development of renewable energy in France. The bill is expected to include reforms on sharing value creation from renewable energy, speeding up regulatory proceedings, land release and strategic planning. It will be first discussed in the Senate in October and will then be reviewed in the National Assembly in midNovember at the earliest, once the first reading on national budget for 2023 is closed.

The mains provisions of the bill are to facilitate the deployment of renewable energy infrastructures and to tackle the structural delays which have been impeding the green transition in the country over the past few years.

As a result, the delay caused by the need to obtain environmental permits will be reduced and the ability to contest the deployment of infrastructure in court will be restricted. No doubt that the parliamentary discussion will be heated. Confronted by a global energy crisis and structural domestic issues, maintaining the status quo will not be an option for French decision makers.

Debates around nuclear power

In the first few years of his mandate, Emmanuel Macron adopted a cautious position regarding the nuclear energy, ultimately leading to the closure of France oldest reactor in Fessenheim (East).

As part of his effort to bolster the country’s industrial and strategic autonomy, the Government’s approach turned towards an expansion of the nuclear production.

Even prior to the Ukrainian crisis, President Marcon called for the construction of eight new reactors. Originally thought to be included in the aforementioned bill, this expansion is now expected to be discussed in a separate piece of the legislation. French statecontrolled utility giant EDF has already appointed an executive to handle its new nuclear branch.

Meanwhile, debates continue on whether there is a need to prolong the lifeexpectancy of older reactors from 50 to 60 years in order to support short-term production.

Furthermore, within the framework of the “France 2030” investment plan, the Government dedicated €1bn to a call for proposals for “innovative nuclear reactors”, with the stated objective of providing France with a prototype of a SMR, the so-called mini reactor.

Finally, in order to set a clear course for the nuclear industry and meet the growing need for electricity, without challenging the development of renewable energies, a Senate report published this summer and written by Senators Sophie Primas, Amel Gacquerre and Franck Montaugé, recommends removing the limitation of nuclear energy production to 50% by 2035 from the energy planning. Without a doubt, this issue will be a matter during the multiannual energy program’s revision that will be held in 2023.

Building a new status-quo post-2025 with the European Commission

Opening electricity markets in France has been a matter of contention with the European Commission for more than 20 years. The Commission regularly stresses its disappointment with the fact that the ARENH scheme, which ends in 2025, failed to foster competition in the production segment of the electricity market, especially regarding hydroelectric concessions.

In such a context, the Government tasked former ArcelorMittal’s CEO, Philippe Darmayan, with mapping out possible future scenarios to determine how to allow electro-intensive industries to sign long term energy contracts.

Reactions from French companies: arbitration between supply & costs

The energy crisis has disrupted many companies’ plans in an already difficult context, exacerbated by tensions on supplies (raw materials and utilities) and the labor market. Disparities are noticeable between the larger entities who usually manage to implement pricing strategies to cover their risk (with some record H1 results) and smaller companies that are struggling with their cash-flows.

However, with worrying signals coming from analysts and policy makers, companies’ strategists are increasingly struggling to square the circle with the so-called “energy trilemma”: affordability, security of supply and sustainability. Operators are inclined to embrace calls for energy savings not only for fulfilling their “social” part of the problem but also for mitigating costs. Electro-intensive operators are facing significant uncertainty in the security of supply for winter this year.

Now and Then

Upcoming Milestones

  • August 2022: Publication of the purchasing power package

  • September 2022: (Mid-September) Presentation in Council of Ministers of the bill for the acceleration of renewable energies (End of September) Presentation of the roadmaps to reduce energy consumption 10% in two years

  • End of September/Early October 2022: Presentation of the Energy efficiency plan Presentation of the Emergency plan in the event of an energy supply disruption

  • Mid-October 2022: Opening of the discussions in Parliament on the bill for the acceleration of renewable energies

  • 1st November 2022: Deadline to reach 100% of completed gas reserve capacity

  • October to December 2022: Discussion and adoption of the Finance bill for 2023

  • Q4 2022: EC decision on the approval of the new price for the ARENH scheme

  • End 2022: Deadline for the 90% ban on Russian oil imports decided by the European Council

  • During 2023: Discussions in Parliament on the bill for the “new nuclear” Presentation and discussions on the first 5-years bill revising main energy objectives

  • June 2023: Deadline for the call for projects “innovative nuclear reactors”

  • End 2025: End of the ARENH scheme

FGS Global Recommendations

Seize opportunities:

Companies are expected to position themselves for investment opportunities as early as possible with public stakeholders, both at local and national levels: the French Government is extremely keen to grow the pipeline of renewable projects and kick-start new nuclear plants.

Team-up:

Partnering with French companies and funds will be important to be seen as helping to address possible sovereignty issues. This is likely to be a main feature of tender offers regarding the development of new sources of energy in France.

Speak-up:

Companies are expected to make themselves known to all audiences, this will increase legitimacy and credibility as far as their commitment to support the growth of energy sources in France is concerned.

Watch-out:

Regarding existing operations and future activities, it will be important to monitor any new development in regulations or change in emergency measures from the Government.

Stand forward-looking:

Contingency measures on power supplies must be set up at the earliest, potentially liaising with local public agencies if need be and with any other relevant stakeholders. The use of alternative sources of power or the closure of some businesses must be assessed in consultation with local communities, should there be a potential impact on the environment. This will prevent any reputational backlash, transparency is key in that respect

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