France under pressure to compromise in EU electricity market talks

The European Commission tabled the electricity market reform proposal in March 2023 in a bid to contain rising power prices caused by the Ukraine war and decreased supplies of Russian gas.

But what was supposed to be a quick process has ended mired in debates about state aid for power generators.

Paris wants to apply two-way Contracts for Difference (CfDs) to finance the lifetime extension of its 56 existing nuclear reactors as part of the reform, in line with the European Commission’s original proposal.

That move is resisted by EU countries like Germany and Spain, who are engaged in a transition to 100% renewable electricity and fear it will give French industrialists an unfair competitive edge by opening the floodgates to abundant, cheap nuclear power.

CfDs would also have the advantage of replacing France’s much-decried ARENH system, which regulates the sale of electricity from the country’s historic nuclear fleet and is due to expire on 31 December 2025.

To unblock negotiations, which have stalled for several months, France and Germany have committed to negotiate a “joint agreement” in the words of French President Emmanuel Macron, who spoke after a summit in Hamburg on Monday and Tuesday (9-10 October).

Immediately after the Hamburg summit, EU presidency holder Spain presented a new compromise proposal, which completely removed the possibility of financing the repowering of existing assets with CfDs.

According to French and German sources, this radical proposal revealed by online news site Contexte on Wednesday (11 October), caused “surprise” in Paris and Berlin.

Pressure from Spain

With the Spanish proposal, the French now appear to have their back against the wall.

At a press conference on Wednesday, German Economy and Climate Minister Robert Habeck repeated Berlin’s concerns about the risk of distorting competition if the lifetime extension of existing nuclear plants was financed with CfDs.

As reported by AFP, the disagreement “for once, has nothing to do with the form of energy, whether nuclear or renewable”, Habeck said. Rather, it has to do with the fact that France relies on state-owned utility EDF as the main contractor for CfDs which are themselves guaranteed by the French state.

“Thanks to state guarantees, [EDF] can do […] what a market economy system cannot do,” Habeck said. “This is what needs to be clarified, and this is where we are on the way to clarification,” the German minister added.

In that sense, Spain’s proposal to scrap CfDs altogether for the repowering of existing assets may also be an attempt to force Paris to sit down and compromise, observers say.

“This could make sense given the Spanish presidency’s desire to conclude the dossier by the end of the year and push France to negotiate with Germany more quickly than perhaps expected,” says Phuc-Vinh Nguyen, a researcher at the European think-tank Institut Jacques Delors.

EU member states are indeed coming under pressure to reach a common position as soon as possible, in order to leave enough time to negotiate a final deal on the proposed reform with the European Parliament before the EU elections in June.

The bloc’s 27 energy ministers will meet in Luxembourg on Tuesday (17 October) for a potentially decisive energy council meeting to try and hammer out a joint position. After that, only two official energy councils are scheduled, on 5 and 19 December.

Spain’s role in trying to force an agreement ahead of Tuesday’s Energy Council “seems plausible,” confirmed Nicolas Goldberg, an energy market expert at Columbus Consulting.

However, Paris will not give in so easily. “The optimism shown by Emmanuel Macron may suggest that France is not ready to drop the ball on CfDs for existing nuclear plants,” Nguyen said.

France keeps pushing for CfDs

According to Nguyen, there are several reasons why France keeps insisting on CfDs for existing nuclear plants.

Firstly, because they would make it possible to regulate consumer prices by setting a ceiling above which electricity producers would redistribute their benefits to consumers, a move backed by consumer groups and electricity suppliers alike.

“We fully support the [European] Commission’s initial proposal on the use of CfDs to encourage investment in new and existing production capacity,” a group of electricity consumers and suppliers said in a statement published on Thursday (12 October).

Secondly, because France and Germany “do not want a subsidised model” for Europe’s electricity market, except for large consumers of electricity, in line with Berlin’s desire to satisfy the demands of its industrialists, the French President said in Hamburg.

“We want a model that corresponds to the production costs [of electricity],” Macron said, repeating an argument often made by French officials during briefings with the media.

This is an appeal to EDF, which has been asked by the French government to price its electricity closer to the level of nuclear production costs – around €60-70 MWh, according to a French source.

It would also allow Macron to keep his promise to the French people, made in September, to “regain control of electricity prices” by the end of the year.

As long as the new financing system complies with EU state aid rules, “it can be done, but it would be better within a European framework,” says Goldberg, the energy market expert.

Still, according to Goldberg, French officials should be careful about where the ceiling of the CfD will be set as this could deprive EDF of much-needed revenue at a time when the company is in financial trouble.

Contacted by Euractiv at the time of writing, the French energy ministry and the Elysée Palace declined to comment.

In the French Parliament, though, lawmakers are more talkative, saying the Spanish compromise proposal is unacceptable.

“The Spanish Presidency’s proposal will lead France to defend its interests: develop this proposal or legislate ourselves,” said Antoine Armand, spokesman for Macron’s Renaissance group in the French National Assembly.

“Many of us are ready for it,” Armand declared on X, suggesting France may ultimately decide to fly solo when reforming its electricity market.