The ARENH, regulated access to France’s historic nuclear energy

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The ARENH, regulated access to France’s historic nuclear energy

Regulated access to historic nuclear energy (ARENH) allows ‘alternative’ (or non-historic) energy suppliers to have access to a quarter of EDF’s nuclear electricity production at a fixed price agreed for all. EDF, the historic electricity supplier in France, operates all 58 active nuclear reactors financed by French consumers in the days when EDF was a monopoly. According to the electricity transmission network RTE, in 2019, 70.6 % of the energy mix was provided by nuclear energy.

How and why was this ARENH mechanism born?

In 2007, after the complete opening of the electricity market, the European Commission expressed its dissatisfaction with the procedure for liberalising the electricity market in France, which distorted competition. Solutions are therefore being sought with the following objectives:

– Allow French consumers to benefit from cleaner and less expensive electricity by sharing nuclear production with all consumers and not only those of EDF.

– Favouring competitiveness in the market and encouraging investment by stakeholders.

In 2009, the first report was presented to Jean Louis Borloo, Minister of Ecology, and Christine Lagarde, then Minister of Economy. On 7th December 2010, the so-called NOME Law was enacted, which came into force on 1st July 2011 and aims to be completed by 2025.

The Energy Regulation Commission (CRE) set the price per MWh of the ARENH in 2011 at €40/MWh and in 2012 it rises to €42/MWh until today. The CRE sets the price, and the government approves or not the proposal.

Each year, any supplier that wants to have access to this nuclear production has to request the volume it wants from the CRE according to the size of its customers’ portfolio. The CRE notifies RTE and EDF of the total volume of ARENH demanded for each supplier. The CRE also transmits to the CDC (Caisse des Dépôts) the total amount to be paid by each supplier and the level of bank guarantees to be provided.

Figure 1: Schematic diagram of ARENH mechanism

At the end of the year, RTE checks that each trader has not demanded too much ARENH volume according to its current entitlements. If such excess demand occurs, the supplier will have to reimburse this excess and even pay financial penalties.

How has the ARENH mechanism evolved?

Since the adoption of the ARENH mechanism in 2011 until 2018, the total demand limit of the ARENH volume that EDF required to offer did not exceeded. This limit is set at 100 TWh, a quarter of EDF’s nuclear production. In 2019 and 2020, the 100 TWh limit was exceeded for the first time. In 2020, 81 suppliers jointly requested 146 TWh from ARENH for the year 2021. As a result, RTE had to apply a supply reduction coefficient for each supplier. In 2020, they received only 68% of the volume they had requested. Likewise, in 2019, the ARENH volume requested was 133 TWh and the suppliers received 75.2% of their requested volume.

Today this volume reconfiguration represents the greatest risk for the consumer. It generates a great deal of mistrust as it forces consumers to redefine their purchasing strategy in a very short period of time and particularly close to the delivery deadline, with a significant part of consumption having to go to the wholesale market in the middle of winter, with the risk of volatility that this entails.

Has the mechanism met the aims set by the European Commission and the French government?

Overall, reaching the ARENH limit does not seem to disturb the development in the residential consumer segment, as shown by the regular increase in the market share of alternative suppliers: 15.5% at the end of 2017, 19.5% at the end of 2018 and 23.4% at the end of 2019.

Similarly, for non-residential consumers, the market share of alternative suppliers has been increasing in 2019 despite reaching the ARENH limit. The share of these suppliers in the sector was 39% in 2017, 43% in 2018 and 46% in 2019.

However, reaching the ARENH limit has had a negative impact on the development of fixed price offers in 2019 for medium and large consumption sites. For the procurement of future electricity supply, it is necessary to anticipate the cost of energy and capacity procurement over the contracted period. Reaching the ARENH limit introduces an additional risk for suppliers, who cannot know precisely what part of the customer’s consumption can be covered by the ARENH price for the duration of a contract exceeding one year.

Paradoxically, more the volume of alternative supplier’s activity rises above the 100 TWh ceiling, more the cost of supply increases for all French consumers. After reaching the ARENH limit in 2018 and 2019 , an increase of 3.3 €/MWh and 1.4 €/MWh was noted in December compared to November for the supply of energy from the TRVEs (regulated tariffs for the sale of electricity). Similarly, these increases were observed to a greater or lesser extent for all customers whose supplier adopted the strategy (without risk for them) of going to the wholesale market once the results of the amount of volume without access to ARENH are known. If these volumes were not capped, consumers would not be dependent on the price volatility observed at the end of the year.

In view of the development of competition on the electricity market in France, the situation where the ARENH cap is reached is likely to be reproduced.

All this is indicative of the deep-seated dysfunctions in the ARENH system because they contradict the objectives of the NOME Law, which aims at ‘freedom of choice of electricity supplier, while ensuring […] that all consumers benefit from the competitiveness of the French nuclear power plant fleet’.

Since then, what proposals have been made to modify the ARENH mechanism?

The year 2025 is approaching and many authorities are proposing to reform the ARENH mechanism.

One of the most talked-about proposals for correction is the extension of the ARENH limit to 150 TWh. However, the CRE has estimated that even then the volume could be reached quickly considering that in 2020 it reached 147 TWh. Nevertheless, it would substantially limit the impact of the ARENH supply reduction correction coefficient and consumers would be the first to benefit. On the other hand, this increase in the ARENH cap would probably lead to a revaluation by EDF of the ARENH price, which would increase.

Another proposal is an upward revision of the ARENH price above 42 €/MWh. When ARENH was created, some demanded a price of 49.5 €/MWh while some alternative suppliers asked for a price of 35 €/MWh. In the end, Jean-François Carenco, president of the CRE, was blunt and said: ‘Why 42 €/MWh? Because not 43 €/MWh’.

EDF CEO Jean-Bernard Lévy described the ARENH mechanism in 2019 as a real danger and EDF’s biggest handicap. For them, the mechanism is an option to their disadvantage. That is, if the market price exceeds the ARENH price then everyone wants ARENH and EDF will sell its product at the ARENH price. However, if the market price is below the ARENH price (which was the case between 2015 and 2017) then nobody asks for ARENH and EDF must sell its production on the market at a price lower than ARENH. According to them, they have the choice between losing or losing. This fact limits EDF to consider financing new reactors and maintaining existing ones.

Figure 2: ARENH Price comparison with SPOT market evolution

 

Figure 3: Comparison Price ARENH with calendar products evolution

In 2020, at the height of the Covid-19 pandemic, with wholesale market prices plummeting, debates and criticisms of the ARENH mechanism intensified and reached a paroxysm. For the first time, some marketers wanted to renounce ARENH after having placed the order. Total Direct Energie, Alpiq and Gazel played the ‘force majeure’ card. EDF first refuted such a request but was later forced by the Paris Commercial Court to suspend contracts with some suppliers.

Another proposal by the government and CRE was the introduction of a ‘corridor’ price with a price ranging between 42 and 48 €/MWh. However, now it seems that the ARENH price discussion is above these prices with the CRE recommending 48 €/MWh and EDF 53 €/MWh. Negotiations are very tough, and the popular opinion is spreading that the next change will come with the next presidential elections in 2022.

What place does this mechanism have in the transition process?

If nuclear energy is recognised as a fundamental part of the energy transition, this delay in taking the decision to reform the ARENH mechanism is directly affecting France’s energy transition plans given the financial instability that hangs over to finance new reactors and maintain existing ones.

The renegotiation of this complex mechanism needs not only the approval of Paris, but also the endorsement of Brussels. Under this logic, numerous efforts and tense debates are already taking place between France and the European Commission.

EDF is preparing the ‘Hercule’ project with the aim of obtaining better remuneration for the electricity produced by French nuclear power plants. EDF is currently heavily indebted and must invest heavily to prolong the life of its nuclear fleet and at the same time develop renewable energies in order to catch up with its competitors. ‘Hercule’ would result in a split of the group into three entities: a public company (EDF blue) which would oversee the nuclear power plants and the transmission network. Another (EDF Green) would bring together the commercial activities, electricity distribution and renewable energies. It would be listed on the stock exchange, allowing it to attract investors to develop wind and solar energy. A third public entity (EDF azure) could be in charge of hydroelectric dams. Negotiations with the European Commission are still ongoing to define the outline of this spin-off.

The question of the ARENH mechanism is therefore not merely economic, it is political and the future of the energy transition in France.

Juan Carlos Romaní | Energy Consultant

By | 2021-04-14T09:20:36+00:00 April 13th, 2021|Categories: Energy Markets, Energy Policies, Featured, M·Blog|Tags: , , |Comments Off on The ARENH, regulated access to France’s historic nuclear energy