Energy price crisis: tariff shield and the role of nuclear power

[Updated on 15 September 2022] Facing rising energy costs in Europe, France has introduced a tariff shield in 2022 and promises to limit price increases to 15% in 2023. The state is very protective of households. What role did nuclear power play in this mechanism?

On 26 August, wholesale electricity prices for 2023 in France [1] reached a record high of over €1,000 per megawatt-hour (MWh), compared to €85/MWh a year earlier. While many are worried about household bills, the government [2] announced on 3 September that it would maintain a “shield system” in 2023 to “protect the French and their purchasing power.”

On Wednesday, 14 September, Prime Minister Elisabeth Borne specified the maintenance conditions limiting the increase in energy, electricity, and gas prices by 15% from 23 January. Bruno Le Maire, Minister of the Economy, calculates that the tariff shield will cost 16 billion euros “net” in 2023, namely 11 billion for gas and 5 billion for electricity. The Minister also announced specific aid for SMEs.

As for 2022, it is necessary to understand the relationship between wholesale and retail prices and how France compares to other European countries. In particular, the situation highlights how nuclear has helped protect the French in 2022 from the massive bill increases seen in our neighbors. As we shall see, much of this burden has fallen on EDF’s finances and is contributing to the company’s financial difficulties.

An electricity market linked to gas prices

The wholesale market is where the supply of electricity (producers) and the electricity demand (suppliers, who buy it to resell it to end customers, whether private individuals or professionals) meet. Trades are made either over-the-counter or on the exchange on Epex Spot France for spot trades (daily maturity, the day before for the next day) and EEX for forward products in Europe (week, month, quarter, year). Like most markets, it evolves according to the supply/demand balance. Prices on the spot and futures markets, the regulatory bases defined by various European texts since 1996, are set according to the “merit order” method. Forward products are more representative of suppliers’ supply costs, which are ultimately passed on to end customers.

In the order of economic merit, the means of production are classified according to their variable production cost (marginal cost). Solar and wind power come first, followed by nuclear, gas, and coal-fired power stations. The offers are held back in order of economic precedence until the electricity demand is met. In general, thermal power plants are marginal. Their production cost, including the cost of CO2, sets the spot market price.

A multifactorial crisis

From the autumn of 2021, electricity prices on the European wholesale markets came under pressure from the first increase in gas prices. This was linked to the post-Covid recovery and the rise in CO2 prices. This increase was amplified across Europe by the war in Ukraine from the end of February 2022 and international competition for liquefied natural gas purchases. The decline in the availability of the French nuclear fleet, following the discovery of stress corrosion phenomena, comes on top in the case of France. According to Jean-Bernard Levy [3], CEO of EDF, the first two factors linked to the gas markets explain 85% of the price increase today.

electricity prices on the wholesale market (threat of an embargo on Russian oil / EDF announces the closure of 2 reactors at the Chooz plant / Russia cuts off gas to France and some European countries)

To protect households from price increases, the government decided, when the 2022 Finance Act was passed in November 2021, to cap the rise in regulated electricity sales tariffs (TRVE) at an average of 4% (including tax) on 1 February 2022 for all eligible residential and professional consumers. As a reminder, the RETS represent the offers made by the historical electricity suppliers in France, i.e., EDF in 95% of the territory and the local distribution companies (ELD) in the remaining 5%. According to the CRE [4], at the end of June 2021, almost two-thirds of the 33.6 million residential sites still had a supply contract at the TRVE rate, knowing that a significant part of the market offers (proposed by alternative suppliers) remained indexed to the TRVE rate (often with a discount of a few percent).

The crucial role of Arenh

To set the regulated tariffs, the Commission de régulation de l’énergie (CRE), an independent administrative authority, follows a “cost stacking” methodology under conditions laid down by law. The TRVE is constructed by stacking three components representing approximately one-third of the total: network transmission costs, taxes, and electricity supply (supply and marketing). The supply part is calculated for a large part from the cost of supply at the regulated access to historical nuclear energy (Arenh), the price of which has been frozen at 42€/MWh since January 2012. It also considers the cost of supplying the remaining part of the energy under market conditions beyond the Arenh volumes.

In its deliberation of 18 January[5], the CRE proposed to the Ministers of Energy and the Economy to change the TRVE, on 1 February 2022, by + 44.5% excluding VAT (i.e., 35.4% including VAT) for residential consumers, which took into account, in the calculation of the TRVE, the unprecedented increase in wholesale electricity prices. The government refused the CRE’s tariff proposal and set, by decree, a TRVE scale corresponding to an average increase of 4%, including tax, as allowed by the provision in the Finance Act.

A price differential between France and its neighbors

Before the crisis, France offered, largely thanks to its nuclear energy, much lower electricity prices for households than its neighbors. Thus, in 2021, the difference with German prices was almost 70%.

household electricity prices (EU27 / Germany / Belgium / Spain / France / Italy)

This gap between France and its neighbors has widened when we look at the increase in electricity bills[6] for households over one year in different European countries[7].

evolution of electricity prices (total bill) for residential use

We can see that over one year, between July 2021 and July 2022, while the average French bill has remained below €750/year, it has doubled in Belgium, the Netherlands, Germany, and the UK. The UK has announced an additional retail electricity price increase of 80% on 1 October 2022.

A recent study by INSEE[8] concludes that the measures taken this year to cap gas and electricity prices would have limited inflation by at least three percentage points.

In August 2022, France was the first country in the eurozone to limit the effects of annual inflation as much as possible, with a rate reduced to 6.5%, lower than the rates observed in Germany (8.8%), Belgium (10.5%), Italy (9.0%) or the Netherlands (13.6%)[9].

Financing of the tariff shield

Two sources of funding are specified. Firstly, the increase in the Arenh (regulated access to historical nuclear electricity) ceiling by 20 TWh over 2022: EDF had to make available to suppliers already benefiting from Arenh who requested an additional volume at €46.2/MWh while purchasing from these same suppliers an equivalent volume of energy at €257/MWh (see analysis on the economic value of nuclear power).

On the other hand, the reduction of the domestic tax on the final consumption of electricity (TICFE). The government has set the rate of the TICFE at €1 per megawatt-hour for households, compared with €22.50 per megawatt-hour previously, for the period from 1 February 2022 to 31/01/2023. This is the minimum authorized by Brussels. As a reminder, Sfen, in its white paper (Act II), proposes that the reduction in taxation on electricity, a low-carbon vector of the energy transition, be made permanent.

In its press release of 14 March 2022, the EDF Group estimated the negative impact of the first decision on its Ebitda 2022 at 10.2 billion euros. On 2 September, the Minister of the Economy[10] estimated that the State would have spent €10.5 billion on the electricity tariff shield.

Budget Minister Gabriel Attal announced on 2 September on France Inter that the tariff shield would be extended to 2023 in the face of inflation and the unprecedented rise in energy prices due to the war in Ukraine. While preparing the 2023 budget, he nevertheless specified that he did not wish to let “the bill of the French or our public finances go off the rails .”He said that “arbitrations are underway” and “must be made in the next few days .”This crisis has shown the need for energy sources independent of the vagaries of political agendas. This is the case for nuclear power, as for all sectors. ■