What was the French-German spat on energy really about?

More heat than light (which makes finding a compromise all the more remarkable)

The relationship between France and German was described a few days ago as hopelessly stuck, with persistent disagreement on nuclear energy blocking the new energy market regulations as well as decisions on other topics (more debt at EU level, joint military procurement, etc) and generally slowing down the EU as a whole. An agreement has now been found, which maybe will help change both the perception of a crisis in the relationship (which the English language press loves to play up) and the reality of disagreement between France and Germany.

The weird part is that they seem to have fought on something completely irrelevant in practice and purely symbolic. But these are the hardest to solve… Thankfully the compromise found gives a symbolic victory to those who cared about the symbolic aspects (France) and a practical victory to those who cared about the practical aspects (Germany) - in that there is real progress on the renewables side of the package, via, among others, the promotion of two-way CfDs as the main revenue regime to be used (which I've pushed for for years, so I'm quite happy about that).

More generally, it is good to see that the idea at the heart of Europe, that even when we fundamentally disagree, we force ourselves to find a compromise, is alive and well. Heartening in those times when religious fanaticism and war-mongering nationalism are on the rise...

Notionally, the dispute was about the possibility to use contracts for differences (CfDs), well known to readers of this blog, for nuclear - both for new plants and for the refurbishment of existing plants. The compromise allows the first but not the second

A number of arguments have been brought forward:

• France is trying to steal industrial activity from Germany with its cheap electricity now that Germany has lost access to “cheap” Russian gas (with the variant that Germany, with its failing energy policies, is trying to drag down France, by damaging what works in France on that front, ie nuclear)

• France needs nuclear to be counted as green (or at least to get the CfDs) in order to be able to invest in the sector

• France needs to be able to cap prices to limit power price increases for consumers and let them benefit from its cheap nuclear power

None of these make sense.

“Cheap”

First of all, Russian gas was not “cheap” - it was sold at market prices, and theses were (i) higher in Europe than in the US, and (ii) quite harmonized across Europe

Source: Pepjin Bergsen

Gas prices did get higher last year, which obviously had an impact, but they were not cheap to start with (and France, which imports most of its gas like Germany, including quite a bit of Russian gas, had very similar natural gas prices).

France has had cheap electricity for its population for a long time, but that’s mostly because there are fewer taxes and surcharges than in Germany on retail prices. Wholesale prices are quite similar, and German industry is exempt from the EEG, the surcharge that pays for renewable energy (mostly the solar projects from 2009-2011 which were at very high prices). And, as noted in a post last year, the 2022 energy crisis was also caused by EDF’s nuclear woes, and power prices were quite often higher in France than in Germany then - because France had a bigger shortfall of electricity…

The idea that France will somehow steal industrial activity from Germany if it builds new nuclear plants (not available before 2035 at best) or simply refurbishes existing ones (which it needs to do anyway, at a price which, according to EDF’s own estimates, is more expensive than new offshore wind) seems ludicrous.

CfDs

EDF is now 100% state-owned. Investment in new nuclear plants will not attract third party capital - it’s just seen as too risky. So it will be on the balance sheet of EDF, effectively underpinned by the French taxpayer. Whether that takes the form of direct subsidies, or CfDs, or indirect support in the form of an increase in the regulated tariff of electricity (sold by EDF to retail consumers), the cost will be borne by the French, whether as taxpayers or ratepayers. The idea of EDF as an independent entity, profitable on its own merit, is gone. It is a political tool both on the revenue side (controlling the retail price) and on the cost/investment side (building new nuclear plants), and its accounts are now, quite frankly, a fiction - the impact of the political decisions on these two items dwarfs everything else.

The CfDs themselves will not get new plants built, but they might have helped with the refurbishment of existing plants, which needs to happen, and is a much lower risk endeavor than new plants (and could conceivably have been financed by third party debt, along the lines of the old Exeltium mechanism). In any case the French government can get the economic equivalent by tinkering with the regulated retail price.

The only real item at stake is what will become of the ARENH, the mechanism whereby EDF was forced to transfer 25% of its nuclear production to other parties at a lowish price. That mechanism was imposed by the EU for ideological and absurd reasons (competition leads to lower prices, so we want competition; there is not enough competition in France because EDF’s production is too cheap; let’s create competition by handing over some of that production to new entrants, and force EDF to increase prices…) and it has only benefitted a few intermediaries with no obvious benefit to consumers or to the overall market. At current market prices it is a material transfer of wealth from EDF and/or French taxpayers to a few private companies (and occasionally, their customers) that has no justification whatsoever. But it’s the symbol of “competition” and the EU is keen to keep it in some form. But it’s not discussed in the new energy package…

Capping prices

Along with the justifiable frustration with the ARENH mechanism, there is a sense of unfairness in France that power prices got very high when the cost of nuclear did not move, but that comes only from a profound misunderstanding of how prices are set, and what role nuclear plays in that price mechanism.

The French seem to believe that nuclear plants are ultra flexible plants that easily adapt to demand (which is mostly flat anyway) and do not realize that a baseload production profile does not correspond to the demand profile (despite France’s best efforts to move demand at night, and EDF’s similarly constant efforts to make the nuclear plants “pilotable”) and that flexibility comes from hydro and from - gasp - fossil fuel plants. Prices are driven by the need for these ‘marginal’ plants, especially at times when nuclear output is increasingly weak.

But EDF still generates at a low cost, and if prices are high, it makes massive (virtual) profits on the generation side - these can be passed on to French consumers via the regulated tariffs (at a cost to the distribution side of the same EDF, which is thus naturally hedged - it also benefits from the fixed price supply from renewables projects), which do not need to be linked to the wholesale prices. Only those consumers that chose “competitive” suppliers saw significant price increases, but hey, they made that choice. Market prices are not always lower, despite the propaganda of competition apologists - indeed in the case of power the prices can be very volatile.

So there is absolutely no need to change how wholesale prices are set in order to be able to offer relatively low electricity prices to French consumers, as long as EDF can afford it - and again, that’s purely a political decision as to (i) the retail prices, and (ii) the level of new investment in nuclear, whose profitability is simply unknown.

So the whole debate was theater, playing with issues that did not exist or could be resolved in other ways. Fundamentally, it was a tribal fight between the pro-nuclear and the anti-nuclear, and it’s been a long time since there has been any rational debate on that topic (and since I express skepticism about the possibility of nuclear plants being financed, I am put on the renewable zealot side of the fence… but I’ll say it again:

• From a carbon emissions point of view, Germany should have closed the lignite plants before the nuclear ones, but from the perspective of security of supply and power prices, the order in which these baseload plants are taken out does not make much of a difference. And lignite plants will now be taken out fully, faster than most people expect

• The French nuclear programme was a great success, but the conditions to replicate it are gone, and there will be no new nuclear plants built because they cannot be financed, and there are cheaper alternatives (and baseload is not adapted to our new system).