2023-10-31 07:30:57
Forced to find a solution to the rise in electricity prices, the Member States seem to have reached a compromise to reform the European wholesale market… Nevertheless, the negotiations will continue and tensions remain high, particularly between France and Germany. Explanations.
The European electricity market is not at the end of the negotiations which have been driving it for months. Even though a compromise was announced on October 17 between the various energy ministers of the European Union, the decisions still need to be ratified by Parliament. In the best case, the outcome will be decided before the end of the year; otherwise the prospect of the European elections in June and the establishment of a new Commission will push the calendar back to 2025.
Let’s recall the context. The European electricity market functions as a plate where electrons are exchanged between producers and buyers, including through traders. Prices are fixed in advance between them in the more or less long term, according to forecasts of availability of power plants and consumption. In this market, the power plants with the lowest marginal costs are called upon first (renewable, nuclear), and the price of all means of production is aligned with that of the last power plant called (often gas), therefore on the highest price.
For a long time, this market mechanism did not pose any particular concern. But following the post-Covid recovery and then the gas supply crisis, the cost of the last power plants called up in this “merit-order” has soared, leaving businesses, communities and citizens exhausted in the face of rising prices. On a weekly average, a peak was reached in August 2022 with more than €600/MWh, while the previous record dated from 2008, around €100… and electricity prices in 2020 were around from 15-40 €. States have had to put in place protective shields at a very high cost to public finances. Everyone then called for a reform to encourage long-term contracts for the cheapest power plants, in order to secure a decent price for electricity.
Disagreement over the scope of CfDs
The European Commission made a reform proposal last March, providing that these contracts would apply to new carbon-free installations, both renewable and nuclear. They can be private (PPA – Power Purchase Agreement) or public (CfD – Contracts for Difference). But the French government wanted to go further by asking that its existing nuclear fleet might also benefit from CfD and have the freedom to redistribute a part of the electricians’ income to consumers. Indeed, the latter reap significant profits when market prices are high. But these ideas are not to the taste of everyone in Europe, in particular Germany which fears support for “obsolete” nuclear power in the words of the environmentalist MEP Michael Bloss (quoted by the media Contexte) and aid disguised to French industrialists, at the risk of harming German competitiveness.
At the head of the negotiations, the Spanish presidency of the Union first satisfied Germany and its allies, by excluding existing nuclear power plants from the CfD. In search of a compromise, she avoided opening up other subjects of affront. It has therefore not put back on the table its idea of extending the capping of the infra-marginal rent at €180/MWh to other producers. She also accepted that the countries suffering most from lack of access to Russian gas, notably Poland, might support the operation of their coal-fired power plants through capacity mechanisms.
But to find an agreement with France – which on this occasion put forward its nuclear alliance with countries like Hungary, Romania, the Czech Republic, Croatia – the text ultimately provides for a possibility for the installations existing nuclear power plants to be supported by state aid, under conditions.
DG Competition keeps control
At the end of these back and forths, unanimity was found on October 17 on the text proposed by Spain, apart from the Hungarian side where they abstained, considering that there was no not enough flexibility to set prices in the event of a crisis. On both sides of the Rhine, victory is declared. The French government is convinced that old nuclear power plants will be able to benefit from CfDs: the desire of the French Ministry of Energy Transition is to align the reference price with CRE estimates which gives a cost of nuclear production at €60/MWh*. Specialists are more doubtful: the text certainly opens up the possibility of public support for existing nuclear power, but it is strongly conditional on the goodwill of the Directorate General for Competition, which is very reluctant to accept mechanisms which distort competition. This is why Germany, on the contrary, believes that it has won the game, because it sees in the text a safeguard to avoid any abuse by France, even if it would have liked stronger constraints.
The game is therefore still far from over at the European level to be sure of what France can really use as part of this reform of the electricity market.
* For a long time, the average production cost of existing nuclear power plants was announced around €35/MWh by EDF. It had been revalued at €42/MWh for the Arenh mechanism. A 2021 estimate of the Court of Audit already brought it to an average of 60 €/MWh.
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