Plugged In: the energy news podcast
Coming from the heart of the Montel newsroom, Editor-in-Chief, Snjolfur Richard Sverrisson and his team of journalists explore the news headlines in the energy sector, bringing you in depth analysis of the industry’s leading stories each week.
Richard speaks to experts, analysts, regulators, and senior business leaders to the examine not just the what, but the why behind the decisions directing the markets and shaping the global transition to a green economy.
New episodes are available every Friday.
Plugged In: the energy news podcast
Complexity, competition, break-up
France is set to overhaul the mechanism intended to boost competition in the country’s electricity market, but the measure’s complexity as well as disputes over the potential break-up of energy major EDF could see the government postponing reform.
This week’s episode discusses the French solution for competition, and why there may not be a resolution until 2022 or beyond.
Host:
- Richard Sverrisson, Editor-in-Chief Europe, Montel,
Guest:
- Julien Tedde, CEO, Opera Energie,
- Chris Eales, Editor France, Montel.
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Richard Sverrisson, Editor-in-Chief Europe, Montel:Hello listeners and welcome to the Montel Weekly Podcast, bring Energy Matters in an informal setting. In today's pod, we return to France, and in particular its RN mechanism, which was put in place in 2011 as a way to boost competition in the country's retail sector. The French government is currently looking at ways to replace the mechanism when the current system expires in 2025. We look at the proposals on the table, what they mean for EDF and its rivals, as well as the wider implications for the country's wholesale market. I'm Richard Sverrisson and helping me discuss these issues is my colleague Chris Eales, editor France at Montel. And Julien Tedde of Opera Energie in Lyon. Warm. Welcome to you both. For those listeners who are unaware of who Opera Energie is and what you do, could you give us a very brief introduction?
Julien Tedde, CEO, Opera Energie:I'm CEO of Opera Energie. We are an energy broker, so we help companies find the best electricity and gas deal.
Richard Sverrisson, Editor-in-Chief Europe, Montel:And you're based in Lyon. That's right.
Julien Tedde, CEO, Opera Energie:We're based in Lyon. We, but we are in every city in France, so we approximately 100 people the opera energy and, we are six years old.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Okay. And you deal with the household and the industrial sectors?
Julien Tedde, CEO, Opera Energie:No, only B2B sectors on only companies.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Only companies. Okay, fine. And how would you currently judge the market situation in France? Julian,
Julien Tedde, CEO, Opera Energie:It's it's com complicated. It's a, it's quite complex. I say that, there are this month, the, these weeks. A lot of questions, a lot of questions about the future of the RN mechanism and of the structure of EDF as we know it. These are strange times on the French electricity market.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Absolutely. And hopefully you'll be an enlighten us in what's going on and it's good to have these discussions when there's a lot of debate ongoing in France, not just about the market, but also the future of EDF and the shape of the wholesale market in general. But let's move on to Aaron then Julian. For those listeners who are unaware of the mechanism, what is it and what is the purpose of it?
Julien Tedde, CEO, Opera Energie:If you want to understand Aaron, it's a very French scheme, so if you want to understand Aaron, you have to go back to shortly. You have to go back to the history of the electricity market in France in the 1970s with the old crisis. France wished to move to energy independence, so they built 58 nuclear re reactors and today nuclear electricity is about 70% of the electricity pro production in France. It's huge. And all those nuclear plants, they were financed. By French consumers at the time when EDF was still a a monopoly. So today the cost of this historical nuclear opera production, it has been amortized for many years, so it's relatively low. And by the beginning of the year to two thousands, the electricity supply market in France has been open to competition. So EDF is still the only new nuclear pro producer, but EDF is in competition with alternative suppliers on the supply market. So in 2010, the RN mechanism WA was put in place. So RN stands for regulated access to historical nuclear electricity. So the aim of this mechanism is to share the historical nuclear rents with all the consumers and not only EDF customers. Every year EDF has to sell up to a quarter of its nuclear prediction to its competitors, and it has to sell that nuclear production at a price. That is supposed to reflect the historical production cost. So this price is 42 euro per mega megabit hour. Perhaps we could zoom in on, on that price later. And each year, every competitor of EDF. Has to order volume, electricity, rn, electricity from EDF, so every supplier can order RN depending on the size of their customer portfolio. And at the end of the year, RTE, which is a French TTSO checks that every supplier hasn't requested too much iron re regarding its actual rights. So if a supplier ordered too much iron. He will have to reimburse the excess. He can even pay a penalty if he order really too much iron. There is a limit. There is a ceiling of we, we call it a ceiling of 100 ERs of iron per year. The problem now is at the end of 2020. 81 supplier re requested more than 146 tets of iron. So it's it's more than 100. Every supplier only received about 78% of what they asked for. So this is called capping and it's 1, 1, 1 of the problem of the RN mechanism. And as you said in the introduction, the RN is supposed to be a transitional agreement until 2025.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Thank you very much, Julian. That was a very good summary with a historical perspective. So I can imagine with current wholesale prices and the wholesale prices that we've seen over the last few years. This is in a very attractive offer for ma for many suppliers and company such as yours. But why is EDF opposed to it?
Julien Tedde, CEO, Opera Energie:It's a very good question, but maybe I can talk about the price. The price of 42 which is low when Aaron was set up on one hand the quarter of auditors, like the code accounts in France, asked for a price of 49.5. And on the other hand, some alternative supplier asked for a price of 35. It's quite a gap. And at the end of the day I like the story of Jean Franco, who is the president of the Energy Regulation Commission in France. She said, why 42? Because not 43 at a given moment you have a decision with a lot of technique, but a guy says it's like that. So why 42? Because it's a political choice. So indeed one of the success of Iron is that it opened up the market to competition. So for that it's really a good thing. As you said, EDF is strongly opposed to a end. In 2019 in the hearing before the Senate's economic affairs Committee, E-D-F-C-E-O, Jean he described Aaron as a real danger and as EDFS main handicap. So the EF really is opposed to Aaron and it's a real problem for them because it is an option. To its disadvantage. Let me explain that. If the market price is exceed iron price, then everybody wants iron and then EDF will sell its production at Iron Price. But if the market price is below the iron price and it was the case between 2015 and 2017, then nobody orders Aaron. EDF has to sell its prediction in the markets at low price. So they have the choice between the lo losing and losing. And I think that above all the price of 42, it does not allow EDF to consider financing new re reactors. And this is, I think, the main problem for the Hercules project that is in discussion between between Paris and Brussels.
Richard Sverrisson, Editor-in-Chief Europe, Montel:We'll come back to that, but I think you know that some would say maybe there are other handicaps which EDF maybe has to deal with, but yeah. But Chris, I'd like to bring you in here because or maybe you'd like to ask Julianne some questions, but I think just before, before you do isn't this a very peculiar French way of dealing with this competition element? Some countries would maybe think about breaking up the production or looking at other ways to solve it. This Aaron, seems to be a very complicated way of dealing with this element of competition. What would you say to that? Chris, you've been covering this market for several decades.
Chris Eales, Editor France, Montel:Yes, but it is an unusual method, but we are dealing with a market which has been dominated by EDF the former monopoly, which owns the vast majority of production assets. France. So these discussions other options were all discussed before the Aaron was put in place way back in 2011, I think it was. There was a committee it was called the Trump commission. The Trump saw Commission, if I'm right. Julian, I think. And these different options were considered including I think, trying to introduce competition in a different way, which would've meant actually allowing competitors to own production assets in France, maybe to own nuclear power plants. But that in a situation with EDF in, in complete control almost total control of the production market. It's very difficult to do that. To imagine anyone, any private company building nuclear power plants anywhere in Europe. Now, it's difficult to imagine, even though of course there are governments at least preparing to do that. So this was felt to be the the solution. But yes, it's very French and it
Richard Sverrisson, Editor-in-Chief Europe, Montel:upholds the dominance of the incumbent. In a sense, it
Chris Eales, Editor France, Montel:does reinforce the dominance of EDF in a way. Yes. Because it doesn't really allow true competition into the market. That was one of the criticisms of the original Aaron plan in fact.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Excellent. So if we're now looking at this, there's discussions now, aren't there, Chris? Between the French government and the European Commission isn't there about this mechanism?
Chris Eales, Editor France, Montel:Yeah, that's right. Yeah. We'll. Hopefully come on later to the involvement of EDF in terms of EDF structure, because any changes to Aaron which are under discussion at the moment between the government and the EEC are tied. Restructure of EDF. In fact, EDF has proposed a restructure of EDF in order to improve this reg nuclear regulation imp by improve, to get a better price. To get a higher price. So now the latest we here is. That the government and the cr reportedly mulling increasing this fixed rate of 42 euros. At one point there was talk about a price corridor being introduced, so you would've a range between 42 and 48, something like that. Floor and ceiling. But now it seems, or at least it's reported, that there could be these discussions around increasing, actually increasing this fixed rate. So I suppose we don't know yet. The discussions are ongoing. Nothing has been announced or decided as we understand. But Julian, if I could ask you, if there were to increase the fixed rate, who would therefore be the winners and losers? Would that be a suitable solution, do you think? What would be the outcome if that was to happen? What are the implications of something like that?
Julien Tedde, CEO, Opera Energie:Indeed every, everybody is expecting a price increase. The Energy Re Regulation Commission recommends a price of 48 EDF estimates. The fair price will be 53, but I think we hear the, a price of 48 which would be the future price. Price is one issue, but it would go hand in hand with an increase of the RN volume. We've talked about the ceiling of one 100 te tower hour,
Chris Eales, Editor France, Montel:we, sorry, which represents a quarter of edfs annual new nuclear.
Julien Tedde, CEO, Opera Energie:Yeah. Yes. So may, maybe it could go up to 150 or even the more, more profound o overhaul of the mechanism. So I don't think if we can talk about winners and losers, but I hope in any case that the winners will be the consumers and I think a price increase, it's not shocking. It's not shocking, especially if it makes it possible to build new reactors, but it's really necessary for them. The increase to be planned several years in advance because con consumers needs vi visibility and the lack of visibility is one of the problem of the errand scheme actually.
Chris Eales, Editor France, Montel:So you would be, your company for example, would be happy with a price of 48.
Julien Tedde, CEO, Opera Energie:Oh, We don't. By iron. We, we just he help companies un understand all those issues. And what we see when we were talking with the electricity consumers is that, first of all, it's very complex and bureaucratic. As you said it's very French, but they. Lack visibility. So you can handle a price increase, but you have to plan it. And if you go from 42 to 48, it would be such a price increase, almost 20%. So I don't know if you can have such a huge price increase in 12 months. Maybe you have to plan it several years in advance.
Chris Eales, Editor France, Montel:In fact, the small suppliers, the people, the company's buying this. Output they will be clearly the losers with a price increase such as that. So you would expect something closer to 45 perhaps, or,
Julien Tedde, CEO, Opera Energie:I'm not sure the alternative suppliers would be the losers. If that's what you mean?
Chris Eales, Editor France, Montel:Yeah, because how do they stand to gain with the price increase
Julien Tedde, CEO, Opera Energie:the customers or the alternative suppliers?
Chris Eales, Editor France, Montel:The alternative suppliers, yeah.
Julien Tedde, CEO, Opera Energie:Yeah. The iron price is a price reference, so I don't think it would. Change anything to, to the competition. J Just the price re reference would go from 42 to 48. I think
Richard Sverrisson, Editor-in-Chief Europe, Montel:so. You, it would not have any marked effect on competition, I don't think. But what are the main concerns here from the European Commission and how do you expect the negotiations are still ongoing, I expect. What do you think the outcome would be here?
Julien Tedde, CEO, Opera Energie:You have news ev every day. I've just read papers one hour ago. Sta stating that the discussion was a very com complicated. And sadly I've just broken my crystal ball, so I can't tell the future. I like a sentence from a French co comedian and the Kuan said, forecasting the complicated art, especially when it comes to. To the future. So I don't know, but there, there are ob obviously two, two syn scenarios. E either the current discussions are concluded quickly and you can imagine the setting up of the cul project, and by quickly weeks or month. And if it's not concluded quickly. I think we would go towards a status quo until the next pre presidential election in 20, in 2022. And I think the latter scenario, I think it's the most likely at present because the discussion that really. Hard be between the government and the ec. And there is in France a strong opposition especially from the unions. And you can't hear any voice in favor of the, this project. So it'll be difficult.
Richard Sverrisson, Editor-in-Chief Europe, Montel:So this is the Hercules project, as it's so called, which is. For those listeners who are unaware, it's the plan to split up EDF into a more green version. Yeah. And then also keep the sort of bad bank of the nuclear part. Would that be a correct way of interpreting it? Julian
Julien Tedde, CEO, Opera Energie:exactly. Would split ED, f in, in three parts. In two or three parts. On one side, a public company including the nuclear, and on the other side a private company including re renewable and commerce.
Richard Sverrisson, Editor-in-Chief Europe, Montel:So the iron, any, the discussions and the reforms are very complicated. But is it given an added layer of complexity given. Given that it's tied to these plans to restructure EDF, so does that just add a extra layers of complexities given the opposition, et cetera? So maybe, no, no deal until 2022. 2023.
Chris Eales, Editor France, Montel:Do you think that, that's very interesting that you say that you think that is. The likely scenario now that actually we won't see a deal this year before, before the French elections. In fact, that's what that would mean. Is that a widespread belief now, do you think? In the market? Yes. I think, yeah. And what does that mean then? What impact does that have? Because the part of the reason that EDF is demanding an increase in the. To maintain their nuclear fleet and to build new ones that would, if that was ever to happen. So that would have implications, wouldn't it? A delay.
Julien Tedde, CEO, Opera Energie:The problem is that this reform is very unpopular and the only voice you, you hear in its favor, it's the governments and the management of EDF, and you are right. It for me it's a pity because this reform. For me, it's the necessary condition if you want to construct new nuclear reactors. So if you think that nuclear power is useful for the energy to transition and I have to admit it's my case, then you have to be the disappointed by the delay of this project.
Richard Sverrisson, Editor-in-Chief Europe, Montel:So what's the main, the main opposition to the project? Is it because just changing the nature of EDF, maybe job losses, fears for the future in that sense? Would that be a way of looking at it? Julian?
Julien Tedde, CEO, Opera Energie:Yeah. I think the main reason against that project is that it is seen as a dismantling of EDF. It is seen even as the end of EDF, as we know it. And I don't think it's the case, but it's what the unions say and it's what you can hear on the French media.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Absolutely. And what's, what you can read on Monte as well? I think it has, obviously when the unions react so strongly and cut production at nuclear plants across France, that obviously has a very big impact on prices and on the market in general. Chris, is there anything you would like to round up here and ask Julianne?
Chris Eales, Editor France, Montel:It's really back to these, the implications of all this, do you think you can say as you said, a delay likely before, perhaps nothing before French elections? What will happen? Perhaps we won't have a, will there be different kind of regulation? We could have a whole new plan, depending on the next government.
Julien Tedde, CEO, Opera Energie:Yeah. Yeah. The problem is that if you don't do. Something in the following weeks or month, then you will fall in the pre presidential campaign. And then ED, F and and nuclear plants won't be a problem. So we, it'll be delayed until, 2023 or even 2024. So no one can say what will be decided in the future.
Richard Sverrisson, Editor-in-Chief Europe, Montel:As we often say on this podcast, Juliet, the only thing that's certain is gonna be very uncertain. Yeah. And that's certainly the case with something that's as complex as this. And it's also, it's not just economic, it's political. It's the future of the energy transition. It's something that we'll be watching very closely. Thanks very much Julianne for joining the Monte Weekly podcast this week. And Chris also to you. Thanks ever so much.
Julien Tedde, CEO, Opera Energie:You're welcome. Thank you.
Richard Sverrisson, Editor-in-Chief Europe, Montel:So listeners, that's about all from the Montel Weekly podcast this week you can follow the podcast on our own Twitter account where you can direct message any suggestions or questions or let us know if you have a an idea for a guest on the show. You can also send us an email to podcast@montenews.com. Lastly, remember to keep up to date with all that's happening in energy markets. On Montel News. You can subscribe wherever you get your podcast from. Thank you and goodbye.
