French fuel price cap: nuclear power protects the population against the energy crisis

France’s Prime Minister Elisabeth Borne delivers a speech during the Medef summer conference at the Hippodrome de Longchamp racetrack in Paris on August 29, 2022.

 

The rise in energy costs in Europe is massive, but France is doing somewhat better than its European neighbours. The French government has decided to put in place a strict price cap called a “tariff shield”, a political decision made possible only by the competitiveness of nuclear power production.

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

At a time when Europe is experiencing the most significant energy crisis in recent history, it is essential to understand the relationship between wholesale and retail prices and how France’s situation can be compared to other European countries. This article analyses how France’s promotion of nuclear power has helped protect them throughout 2022 while its neighbours have suffered from crippling price increases.

 

An electricity market linked to gas prices

The wholesale market is where electricity supply (producers) and electricity demand (suppliers who buy it to resell it to final customers, whether private or professional) meet. Trades are made over the counter or exchanged 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. The setting of prices on the spot market, the regulatory bases defined by various European texts since 1996, reflects the “merit order.”

In the order of economic merit, the means of production are ranked according to their variable production cost (marginal cost). Solar and wind power come first, followed by nuclear, gas, and coal-fired plants. 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 multifaceted crisis

In autumn 2021, European wholesale electricity prices came under pressure from the first increase in gas prices. This was linked to post-Covid recovery and the rise in CO2 prices. This increase was amplified across Europe by the war in Ukraine at 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, CEO of EDF, the first two factors linked to the gas markets explain 85% of the price increase today.

To protect households from price increases, the french government decided, since the vote on the 2022 finance law 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 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 proportion 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” method 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 is considered, according to the TRVE, an 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.

 

Difference in price between France and its neighbours

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

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

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Over one year, between July 2021 and July 2022, the average French bill has remained below €750/year, while it is now double that amount 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 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 far 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

There are two specified sources for funding. 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, France has reduced 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, the Sfen, in its white paper (act II), proposes that the reduction in taxation on electricity, a low-carbon vector of the energy transition, be perpetuated.

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 euros on the electricity tariff shield.

Also, on 2 September, Budget Minister Gabriel Attal announced 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 bills 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.” ■

Published on 7 September 2022

Written by Valérie Faudon, General Delegate of Sfen

(Photo by Eric PIERMONT / AFP)

[1] France 24 26/08/22 : Flambée du prix de l’électricité en France : « Les prix sont complètement démentiels »

[2] BFMTV AFP 3/09/2022 « Prix de l’énergie : Gabriel Attal annonce le maintien du bouclier tarifaire en 2023 »

[3] Table ronde REF2022 le 22/08/2022

[4] CRE Juin 2021 : rapport d’évaluation des tarifs réglementés de vente d’électricité

[5] CRE 1/02/2022 Evolution des tarifs réglementés de vente d’électricité : hausse de 4% TTC au 1er février 2022

[6] CREG : Evolution prix de l’énergie Belgique et pays voisins

[7] Ibid.6

[8] INSEE (1/9/2022)

[9] Eurostats

[10] JDD 2/09/22