by Frederic Simon and Nikolaus J. Kurmayer
Both Germany and France claimed victory after an agreement was reached among EU countries on Tuesday (17 October) to reform the EU’s electricity market. Euractiv looks at what Paris and Berlin got out of the deal.
The European Commission tabled the reform proposal in March in a bid to contain rising power prices caused by the Ukraine war – but Germany and France have since disagreed on the specifics regarding nuclear.
The dispute centred on French support to extend the lifetime of its existing nuclear power fleet, with Germany warning this risked distorting the EU market.
The stalemate was unlocked on Tuesday (17 October) when energy ministers from the 27 EU member states agreed their position on reforming Europe’s electricity market
“Europe has shown its capacity to act today,” said Germany’s Vice-Chancellor Robert Habeck, who negotiated the compromise deal for Berlin.
At the heart of the blockade was a European Commission proposal to make contracts for difference (CfDs) mandatory as soon as governments intervene to finance the construction of new power plants.
With CfDs, public authorities will be able compensate electricity producers whenever power prices go below an agreed floor, while producers will have to channel the potential surplus revenue to state coffers when prices go above an agreed ceiling. Any surplus profit is then redistributed to consumers by the state – whether households or industry.
The mandatory system was also meant to apply when governments support a substantial repowering of existing facilities, such as the lifetime extension of nuclear plants.
But conflict arose when other EU countries realised that France could use this instrument to channel the excess profits made by its existing nuclear fleet – which is already largely amorticised and produces cheap electricity – to lower power prices paid by its domestic industry, creating a competitive advantage for French producers.
Calculations by German experts put the amount of money that would be available for reducing electricity prices in the range of €7-20 billion – far more than similar amounts envisaged by Berlin during the planning of its own industrial power tariff.
This caused concern in Germany and Italy, which sought to prevent CfDs from being extended to existing nuclear power plants.
After long hours of negotiations on Tuesday, France seemingly came away from the talks as the victor.
According to the compromise text agreed by the 27 EU ministers, the CfD scheme can be applied “also for new investments aimed at substantially repowering existing power generation facilities, or at substantially increasing their capacity or prolonging their lifetime”.
France claims victory
The deal was welcomed as a “victory” by French energy transition minister Agnes Pannier-Runacher, who said all European countries – as well as the climate – will be able to benefit from cheap nuclear power in France.
Berlin, too, said its concerns had been addressed.
“The only point of contention was whether the CfDs could be used indefinitely for lifetime extensions of existing power plants,” a senior German official explained after the EU agreement was reached.
“This special [CfD] treatment, which would have exclusively benefited France, was now completely deleted from the EU Commission’s draft,” the official pointed out.
The key phrase here appears to be the use of the word “indefinitely”. According to the German delegation, following their negotiated compromise, indefinite contracts would no longer be permitted.
A win for Berlin? Only time will tell. Overall, though, the outcome of Tuesday’s talks seems more favourable to the French who will be able to syphon the excess profits made by their existing nuclear plants to keep electricity prices low.
More importantly perhaps for Paris, the deal will allow France to ditch its unpopular ARENH scheme, which forces state utility EDF to sell part of its nuclear energy production to competitors below market prices, in order to keep within EU competition rules.
With CfDs expected to replace ARENH, the French power utility will now be able to fully recover its production costs instead of being forced to sell at a loss, putting the company on track to restore its troubled finances.
No special powers for Brussels
But what did Berlin obtain from the negotiations?
Most important for Germany was to preserve the essential workings of the electricity market as it exists today – the so-called “merit order” principle where the cheapest and least polluting power plants get priority access to the market.
Those basic market principles were maintained as part of the reform. But other than that, there were no obvious wins for Berlin.
At one point, Germany sought to obtain special powers for the European Commission to scrutinise CfDs concluded between the French government and EDF, which has a de facto monopoly on nuclear production in France. The risk, according to Berlin, was that EDF would be given preferential terms in a way that distorts competition on the EU’s electricity market.
But in the end, EU ministers decided it wouldn’t be necessary as the European Commission’s competition authorities could rely on existing powers to examine state support measures.
“The mechanism works ex-ante [beforehand] in the context of the state aid review when a CfDs regime is introduced,” explains Germany’s economy and climate action ministry.
“What is important and new here is that the test is independent of whether the revenue is distributed selectively or distributed equally to all energy consumers,” added the ministry.
However, French officials were clear that Tuesday’s deal does not confer new powers to the European Commission.
“The text says in the clearest possible terms that it is the Commission’s existing state aid powers which apply, but not any new powers that would be created by the text, which was – let’s face it – one of the hopes of many member states,” said an official at the cabinet of Agnes Pannier-Runacher, the French energy minister.
Experts too see the negotiations’ outcome as a win for Paris.
“I think France came out ahead in this negation, if it were a soccer match I’d score it 3:2 against Germany,” explains Bram Claeys, a power market design expert at the Regulatory Assistance Project, a think-tank.
At the end of the day, it will be up to the Commission to ensure fair competition conditions are respected when it assesses CfDs submitted by EU member states.
“Much remains unclear when it comes to the design of these double-sided CfDs, so the onus will be on the European Commission to provide additional guidance,” says Claeys.
According to the cabinet of Agnes Pannier-Runacher, the EU executive will look at whether the strike price of CfDs is set at a level which covers the production costs of the operator.
“Because the aid must be an incentive, the level must not be too high, it must be proportionate, transparent and non-discriminatory, and it must be based on an objective methodology. All this will be examined by the Commission,” the French source said.
“However, and this is a very important point, the full costs of production will be taken into account when setting the strike price,” the French official added, saying this was made clear by EU energy commissioner Kadri Simson in her public declarations.
EU countries and the European Parliament must now hash out an agreement between themselves in order to finalise the electricity market reform. Negotiations kick-off on Thursday (19 October) with a view to concluding before the end of the year.
*first published in: Euractiv.com
By: N. Peter Kramer
