Regulating the energy crisis

This week we speak to a regulator, a first for the pod, about how the French watchdog has dealt with the country’s energy crisis. Will more French suppliers go under, and what, if anything can be done to shield industry from very high prices?

Listen to a discussion on whether the current market design is fit for purpose, and what the CRE is doing to combat market abuse.

Guest: 

• Dominique Jamme, Managing Director, CRE

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:00

Hello listeners and welcome to the Montel Weekly podcast, bring You Energy Matters in an informal setting. In this week's pod, we have a type of guest that is a first for us. We will speak to a market regulator. Does the energy crisis mean that the continent's market design is not fit for purpose? Can we expect more suppliers or industrial firms to go under amid soaring wholesale prices for power and gas? Does the large price volatility encourage more speculative traders and perhaps open the door for market abuse? To help me, Richard Sverrisson answer these questions and much, much more, is Dominique Jamme of French regulator, CRE, or I think maybe you call it in France, a warm welcome to you, Dominique.

Dominique Jamme, Managing Director, CRE: 0:41

Thank you very much Richard. Very happy to be here. Perfect. We call ourselves true.

Richard Sverrisson, Editor-in-Chief, Montel: 0:46

Dominique, there's been a lot of media coverage of the energy crisis, the impact on suppliers, on households and industrials, but how do you as a regulator view these soaring prices?

Dominique Jamme, Managing Director, CRE: 0:57

First of all, I would say this is basically a gas crisis. That's the erosion of the crisis is gas. We have seen a lot of. Reason for that, obviously a very strong economic recovery in Europe, in Asia, and the rest of the world, which obviously some some tensions on the logistics. We also have specifically in Europe, a very long winter. Last winter, just the last until mid-May. So the underground storms have been very low to panish and to fill. And then, so we have seen this crisis grow and I would say lately we, we have had some at least interrogation on the behavior of the gas pro because it's obviously a very large player and supplier of Europe for gas. And I didn't seem to respond to price signals. That's, that was the issue. And so we have seen lately a strong decrease in gas price linked to the fact that gas promise announced that they will rise a gas supply to Europe starting November. So I understand that maybe that the perspectives that gas pump will act again as a commercial player, which where when the price rises, they try to sell more. So basically we have a gas crisis. Given the importance of gas in the production of electricity, especially in winter, obviously this, we'll have this extension of the crisis to electricity market. If I take France we'll also hear that France is on only nuclear plus hydro. Not at all. We have 13 per plant, gas per plant combined cycle. And so they're mostly used during winter and so obviously we have to pay to, to pay them. And also Northern France is an electric exporter. But not in winter, not when it is cold. We import a lot of electricity on those days. Obviously we import electricity, mostly produce with gas and coal from Europe. That's was for France, but basically electricity pollution, especially in winter is depending on gas. So the link between the two is obvious. One last point, maybe important for the following, maybe if you want this, those crisis are different different because gas France is importing. It's producing 1% of our gas in France. So we are importing all our gas thinking. Europe's not the same figure, but Europe is a highly importer of gas. So this price increases extraordinary price increases are external shock and kind of natural climate. Same. And so basically Europe and France have to pay more for the gas. And so this is collectively a kind of an impoverishment of France and Europe. It's not the case for electricity. Electricity, produce in Europe, especially in France, produce in France and France is a net exporter, as I said. So as a, for instance, for my country, as a national connectivity, we don't become poor with the crisis. We only see massive transfer between consumers who will pay more and more. And the reserves of the, of this crisis and the winners are the producers. Especially the pollution of non-carbon electricity and also the state budget because state budget they sell C2 quotas, which are more expensive than they were before. And also they have these contract, the contract for difference with all the renewable production. And obviously it costs them cost, state budget less and less a lot less money when market prices are high. It's not the same electricity there. We're not becoming poorer, I would say. We just have to organize, and it's up to member states, not regulators, to organize if they want to compensate this transfer. If they want. And we have seen that the toolbox that has been planted by European Commission is just around that the tax policy, social policies may be used to compensate for those transfers.

Richard Sverrisson, Editor-in-Chief, Montel: 4:24

I think you've put that very nicely, Dominique, the reasons why prices are so high. But as you as a regulator, are you concerned about this? And especially if a lot of the reasoning for this is'cause of the actions of one gas supplier to Europe?

Dominique Jamme, Managing Director, CRE: 4:37

I did not say that. The reason for this is the result of the action of one gas supplier. We have many reasons, but I would say maybe perhaps the continuation and in the gravitational the crazy. These last weeks well can be linked. And we see that when we read the press the specialized price can be linked maybe to the of gas pump. As a energy regulator, we are in charge of the surveillance of the and markets of gas and electricity. And so obviously we do our best to do that as sir is in charge of coordinating the action of all the 27 national regulators. So as for France, what we have announced, but this is announce and we cannot. Go further into details and that we are at the moment focusing all our means. Human means technical means on the present period. Because as market surveillance is a very complex issue. And when you have detected some unusual behavior, I would say, then you have to to go into an inquiry, which is a very formal phase. And then you go into, if this is justified or you go into the procedure or the process of sanctioning the actors. But this is taken this will take months or years, so we cannot obviously go, I cannot go more into more details. What we do is that we're focusing our means on looking at what is happening now, gas and electricity markets.

Richard Sverrisson, Editor-in-Chief, Montel: 5:52

I think you've come out, crew has come out and said very clearly that, it's boosting its surveillance activities in the wholesale market. I know you can't give any details or talk, but is that, are you afraid there may be more suspicious activity in this period of high prices and price volatility?

Dominique Jamme, Managing Director, CRE: 6:09

Our mission is, as I will see it is to go guarantee all the public market players, et cetera, et cetera, all the public, that the price formation in the wholesale markets is fair, is good and that the price resulting for that, for this process, just that just reflect. The good balance between offer and demand that our emission and we are doing, I would say three, 3003, 365 days a year. And our process is we have the people working on specific cases and working on inquiries and going in then in into the sanction process. And we also have people working on detecting unusual behaviors, et cetera, et cetera. So what we said that we just focused a lot of these people and means on the present period because when prices are moving, let's say 10 euros per megawatt. One day on another, you have plenty of room obviously for a market abuse, any kind of market abuse. And I absolutely don't say that. We have detect anything and we have run, detect anything yet. But obviously I think it's our mission to can suppress our glass electricity. It is now associated matter. We can even put at risk the economic recovery and the gross rates of some of urban countries. So it's matter of an extraordinary experience. So our mission is just to do our best to look at that say element in real time. And then we see what we can see and we, and if we detect some unusual or a normal behavior, that's how we see saying the things. And I think we are in phase with Aer on that one.

Richard Sverrisson, Editor-in-Chief, Montel: 7:36

Aer has always, has of always often said that it's challenging to keep the staffing at the levels requirement to properly survey the wholesale markets. Is that a worry for It's

Dominique Jamme, Managing Director, CRE: 7:46

happen. A worry in the past? I dunno if it's a secret or not, but let's say about two and a half years ago we have a kind of a certain void in our staff. We're not overstaffed. That's best I can say, I could say. But at the moment, our staff is good and we have no, no vacancies and we are trying to professionalize and reinforce our technical means, our people. And at the moment it's not an issue. It has been, to be honest two or three years ago. Where we had obviously a few key people living in a smaller period of time, and so we, we were a bit less staffed. That's not the case anymore.

Richard Sverrisson, Editor-in-Chief, Montel: 8:20

Excellent. I'd like to move a little way back into the, to the sort of energy crisis as it were now. Now in several of France's neighbors, a lot of suppliers, both gas and power have gone under due to several reasons, mainly 'cause of a lack of hedging forward sales. What's the situation, France? Is Crow expecting more suppliers to, to be in trouble in the coming months?

Dominique Jamme, Managing Director, CRE: 8:41

It would be surprising that the suppliers community is just totally immune to that crisis in France and not in Europe. Obviously even for suppliers that have been very cautious, very efficient in their policy, that's just the risk. The risk are increasing because, for instance the balancing risk it's a matter of volume of imbalance, but also because the price of the energy and it's the price of energy strip is tripling then the financial risk is tripling then the guarantees that you must give to a certain number of counterparties. They also are increasing. So all that is not a very good climate for suppliers. So even if you are very well prepared and covered before the crisis, so that's for sure. Then you may have, I dunno if it was the case in the uk, but maybe supplier that are not covered. And if I understand that, it means that they have sold. And customers contracts with fixed price, but in the supply they have not the same level of coverage. And so that for us is an issue to be honest. We have seen this issue with really understood the difficulty with the crisis. Maybe we aren't, but I think the uk was the same situation we around. For that. But if I look at that, if you are a supplier who doesn't have a very good coverage for that, then when the realtime prices are good for you, then you take the difference because you have sold at a fixed price to your end user. But then if this is the contrary, it. Like in this crisis. And you go under and you go under and and your customers are left on the market without a contract and obviously at the worst moment of the crisis. So this kind of symmetry, for me is an issue I'm speaking very freely for that, but I, I've spoken on that matter in the French press. We will see as a regulator what we'll do what we'll recommend if this is the result of the government of the law or the law. And I would say let's. Go through this crisis and then after the crisis we'll have time and which be the moment to try to join sense and perhaps to make some changes and the rules regarding suppliers. I du not know

Richard Sverrisson, Editor-in-Chief, Montel: 10:45

So what are the options for you as the regulator? What can you do now to. To either, help the situation now and further down the line.

Dominique Jamme, Managing Director, CRE: 10:52

I would say I separate two things. Yeah. During the crisis, try to do the right things, take some emergency measure, and after the crisis, just take stock, think little, and then try to improve things on the long run, I would say, so during the crisis it's a pity, but we have not. At the moment in France, suppliers of not of last resort, dunno how we could translate that in English.

Richard Sverrisson, Editor-in-Chief, Montel: 11:15

My French is not that good. Apologies Dominique, but yeah. Is it similar to the supplier of last resort or is it is a different concept?

Dominique Jamme, Managing Director, CRE: 11:21

Yes. Let's say that's it. That suppliers that will take over the take on the consumer. If a sup, another supplier, go, goes under. So we have not that in price, it's the question of months. Should I, it'll be maybe in place first quarter, 2022, but now it's not there. So we have recommended to our government to just make a decision, take a decision to just design one supplier for of us resort for gas, another for electricity, just temporary without any competitive process because we have not enough time. But I think we have. We hope that the government will follow our advice on that. I think if we have that, then we are properly that's fitted to face any kind of event that could develop.

Richard Sverrisson, Editor-in-Chief, Montel: 12:02

Do you think you could lead to more consolidation amongst small suppliers in France?

Dominique Jamme, Managing Director, CRE: 12:06

Our view as a French relator that this consolidation was probably due to arrive at one moment or another because we have at the moment I would say 55 suppliers active in the electricity market with our electricity market. It's a lot. Maybe it's a stable situation, but maybe not. And we thought that it would arrive, but obviously this crisis could accelerate things. What we don't want to see is that, I would say the bad behavior or some suppliers who just, I just explained before would have an impact on the image. The image of all suppliers, and it would be bad because we don't like to see a situation where we end up with only, let's say five or six very big suppliers is the French one because we have a df in total, but our subary of European big. Energy companies, I think would be a PT because I think we think that small suppliers are, and most of them are behaving well during this crisis. They are giving a lot in terms of innovation, of quality service, of diversity, of the offers for the, and choices for consumers. When you hope that, okay, for some consolidation obviously was probably already in the cards, but. Be happy if it was too heavy and so we are trying to separate bad behaviors and and so maybe bad suppliers, I dunno. And and the collectivity of suppliers who for most of them, are behaving well, even if times are difficult.

Richard Sverrisson, Editor-in-Chief, Montel: 13:29

It sounds like you have a lot of work on your hands. Dominique. I think you have a lot of things to survey at the moment and keep an eye on amongst the energy crisis or the high power prices. There's been a lot of calls. From some governments about the status of the market design in Europe and a calling for some kind of reforms. What's your view here as a regulator? Do you think that the market design is as it is at the moment, is fit for purpose?

Dominique Jamme, Managing Director, CRE: 13:54

I would separate again, gas and electricity for gas. I'm not not. Opinion on some of the proposal, for instance, shared contracts European level, et cetera, et cetera. Honestly, I dunno what I see that in France we have a system for gas storage, which we think is good, which we thought was good before the crisis. And we see the crisis and we are happy with that, which is you can book storage capacity at market value, but then when you have booked them. You have to fill them before winter. Otherwise we face very large, heavy al. And it went a kind of a surprise, I would say, to see that in country that, not a surprise, but to see that in, in this for the winter, coming winter we see in, in Germany and also, so in Netherland or Australia cetera, that some storage are not filled and said this is an integral part of the crisis. So maybe, I dunno if it's so easy to do, but maybe try to say to market payers, okay, you book source capacity. This is free, obviously access to those infrastructure. But then when you book them, you have to fill them before winter, that, that's the purpose of orange. So for me it would be probably an improvement or the regulation. Then you have the electricity. What I would say I have personally and everybody in the community have a lot of explaining to do. Very difficult explaining to do is why in France as we have 90% Decarbonized mix, electric mix, our electricity price is so closely linked to the gas price. So it's very difficult to explain. But, and so we have we have had our economy minister, Mr. La Mayor, that who has just expressed that, that politically speaking, it's absolutely unbelievable and. And it even said obsolete and absurd, so I can understand that. But when you look a bit more deeper it's not that simple. And we have conveyed the message and my presidential for just had an interview in the saying that this market model for electricity in Europe, Europe is a very good. First of all, it has been approved by every member state for many years. Even the last package in 20 was reinforcing this market model. But other than that it's very efficient allocation of means. It allows to optimize globally at European level, the production, and it's saving billion euro per year at European level. All the reserves are also shared efficiently, the connection Azure, efficiently. So we think that we just cannot, should not try to go too much into moving to another. Which by the way, doesn't exist. We do not have another model on the shelf. That being said, we clearly have some improvement to make some improvement to make. And the question of long-term visibility is a difficult one, but because even if you are pro market, et cetera, et cetera, there is an issue there because, for instance, we, the Europe and France wanna re industrialize first and then also. At the same time to electrify a lot of industrial process because we go to the net zero in thousand 50. And, but each case is we have decision in a hundred million euros. And how do you make the decision if you have no visibility beyond, let's say three to five years on the price of electricity? And we think that there is. Probably some sought some work to be done in order to be able to either be more relaxed on long term contracts between suppliers and especially additional consumers. Or also try to have on the wholesale market, I dunno, by what means, but to have some long-term visibility, I dunno, let's say 10 years contract. Maybe we should I dunno how, but we should denominate some market makers. In charge of of bringing some liquidity on those long term period, let's say tenure contracts. Because at the moment you don't have any tenure contract or very of them. And what we have seen also is that in the last European summit, the French government position has a bit. They not saying anymore that is absurd or something like that. But anyway. There is room for improvement.

Richard Sverrisson, Editor-in-Chief, Montel: 17:39

Just the final question, Dominique, in the months to come, do you expect these markets in French, the French electricity, wholesale market to and gas market to get more political scrutiny or less as perhaps if prices, if and when they start to, to fall?

Dominique Jamme, Managing Director, CRE: 17:54

I think that for sure there will have some lessons to, to be learned and I don't expect that I dunno. Difficult to know because politics is politics and not very good at politics, I would say. But I think it's a lesson. When it had, when it happened once it can happen anytime. It don't reopen anytime. So I think we have to be prepared, better prepared, as I said for this. Maybe suppliers and the, and there is some improvement to, to do. And regarding the model. I think that at the moment what I don't like is to have some countries member states saying one thing we have to change. Radically, I would say, and others publishing some things saying no, we have nothing to change that not has how Europe functions. I think maybe it'll be, that discussion will be more efficient and more, more clever when things will have settled down. But no, I don't think that will be forgotten as soon as the price will become we'll lower. No, I think we, we'll have lessons to learn and that even as. We think that we have some proposal to make, but I would say now that is for agency measures and then we have time to think and then we'll have to come up with some improvement of the model, especially regarding long-term visibility, I think.

Richard Sverrisson, Editor-in-Chief, Montel: 19:05

Perfect. Dominique, thanks very much for being a guest on the Weekly podcast this week.

Dominique Jamme, Managing Director, CRE: 19:10

Thank you very much. It was a real pleasure.

Richard Sverrisson, Editor-in-Chief, Montel: 19:12

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