Should France open up its electricity market?

By Benedict De Meulemeester

By Benedict De Meulemeester on 30/06/2009

In France, discussion on the report of the Commission Champsaur continues. In this report, French policymakers try to find some way of abandoning the regulated tariff systems that they continued to apply in the past years. This continuation of a regulated market obviously isn't what the EU has in mind. On the other hand, it has effectively shielded French consumers from the higher power prices that consumers in other countries suffered. To appease the European Commission, France is now looking at a policy that would open up retail markets but regulate the wholesale power market. By obliging EdF to sell its nuclear power at some sort of regulated wholesale tariff to other suppliers, competition in the retail market would become possible without the sort of shocks to prices that could be expected in case of full-scale deregulation.

Open market enthusiasts are not happy with keeping wholesale markets regulated. Read François Lévêque's post in the EU Energy policy blog. On the other hand, I can understand that French policymakers are hesitant about opening up the market completely. In an open market, average total cost pricing is replaced by marginal cost pricing. France is well connected with the surrounding markets and we can see that prices are set for a common French - German - Benelux market. This means that the nuclear power plants (in France) will always run. The marginal MWh’s will be made by either German coal-fired power plants (in off-peak hours) or Dutch gas-fired power plants (in peak hours). This has two important consequences:

1. Without the stability of the fixed part of total cost pricing, the prices become much more volatile. Businesses and consumers see their power budgets swing up and down much more heavily.
2. In times of high coal and/or gas prices, the power price can be pushed much higher than average total cost pricing with nuclear power plants would have allowed.

We can see today in the Spanish market that it is starting to move towards higher and more volatile prices. Read my post of 26/6/2009 on that.

Liberalized energy markets have once been presented to the EU’s citizens as a means of achieving lower power prices. So far, the open EU power markets have not really delivered on that promise. The fact that still-regulated France has lower prices is clear proof of that. Hence, I understand the reluctance on behalf of French policymakers. Moreover, as regulated tariffs are much more stable than marginal prices, they are an incentive to long term investments (such as investment in nuclear facilities).

That said, I do observe that the cheap power could cause France to fall behind when it comes to power efficiency. I recently saw one client shut down its French operation because it wasn’t energy efficient enough. As EdF is stateheld, France might make a more daring policy. If it opened up its markets, profitability of nuclear facilities would certainly rise high when coal and natural gas prices rise. It could use the extra profits of EdF to stimulate energy efficiency improvements with consumers.

Keep up to date with E&C