What will a post-ARENH energy market look like for French power consumers?

A proposed scheme to replace France’s Regulated Access to Incumbent Nuclear Electricity (ARENH) mechanism has energy consumers questioning whether it will provide them with sufficient protections from volatile pricing. The proposed replacement would capture revenue from state-backed utility EDF’s nuclear fleet based on a contract for difference scheme (CfD), allowing the French wholesale market to operate without regulated access to its nuclear fleet.

ARENH: A brief overview

ARENH, which is slated to expire on December 31, 2025, is part of the NOME law and was created in 2010 to boost competition between energy suppliers and EDF. At that time, EDF owned more than 95% of electricity capacity production, including nuclear power plants, which produced electricity at competitive prices.

The ARENH system requires EDF to sell up to 100 TWh of nuclear electricity to other suppliers, representing approximately 25% of its total production. The exact volume allocated to each client depends on their consumption during weak demand periods. ARENH also enables businesses to source between 60% and nearly 100% of nuclear power from EDF through alternative suppliers at a regulated price of 42€/MWh.

To benefit from ARENH prices, consumers must sign a contract with their suppliers, who then transfer requests to EDF and report to the energy regulator. If the ARENH volume requested from suppliers exceeds 100TWh, a reduced volume is allocated. This is referred to as “ecrêtement.”

The proposed scheme

The proposed replacement mechanism would be based on two fundamental pillars: ceiling price and long-term contracts.

 I) Redistribution to consumers under a double ceiling mechanism includes the below formula:

Amount to be redistributed =  x  V produced by nuclear fleet x  (Preference – Pactivation)

This would allow for a redistribution of extra revenue coming from nuclear generation set by , and the difference between a reference price (“prix de reference”) and two strike prices (“prix d’activation”):

• “Prix de Reference” (Reference Price, or Pref): The reference price has not yet been determined. A recent analysis released by the French Energy Regulatory Commission shows the total cost of existing nuclear power at 60 €/MWh at 2022 price levels. Ultimately, EDF, together with the government, is aiming to achieve an average price of 70€/MWh across nuclear production over the next 15 years, beginning in 2026. However, the consultation published in November by the Directorate General for Energy and Climate does not provide a figure for the reference price but does include the following definition: EDF’s effective average selling price, calculated a posteriori from EDF’s energy revenues from nuclear generation in existing plants.
• “Prix d’activation”: The strike price falls under the double ceiling mechanism. If market prices exceed an initial threshold calculated as (i) full production cost of existing nuclear fleet and (ii) a component representing new nuclear power plants, that price would stand at 78€/MWh, excluding capacity. Half (50%) of additional revenue generated by EDF would be passed on to businesses and households.

If market prices exceed a second threshold of 110€/MWh, consumers would receive 90% of that surplus revenue.

EDF obligation =

V produced from nuclear fleet (50% x max [0; (Pref – 78)] + 40% x max [0; (Pref – 110)])

The volume of electricity is currently at 100 TWh under ARENH and, according to trade groups, must be large enough to guarantee sufficient consumer protections in the event of market volatility. The new proposed scheme includes 330 TWh of nuclear production out of a total of 480 TWh in France. Under that scenario, all consumers could potentially have 62% of their consumption covered by the replacement mechanism (330 TWh of nuclear production/480TWh of total consumption x 90%).

This differs from the ARENH system, in which consumers are typically covered for approximately 60-75% of their consumption profile, while heavy electricity consumers are covered for nearly 100%.

What would the proposed scheme look like under current market conditions?

Future calendar prices of the product Base Load in France as of 14 February 2024 settlement time – the 2025 calendar product continues to fall, dropping below 80 €/MWh. It was close to 70€/MWh for 2026 and lower for 2027 and 2028, with a tendency to decrease.

Source: EEX Product France Baseload Futures and Alfa

Source: EEX.com

According to the ceiling mechanism, if market prices fall below the strike price (78€/MWh), there would be no compensation and consumers would remain at market prices. If market prices hit above 78€/MWh, consumers would receive 50% as compensation on the difference.

In either case, reductions would apply to the volume of consumption coming from nuclear production, up to 62%. The remaining 38% of consumption would maintain market pricing.

Under the ARENH mechanism, a standard consumer is entitled to 75% of volume and compensation of the difference at any market price higher than 42€/MW.

Redistribution of benefits: Amounts will be calculated according to peak and off-peak consumption hours per season to encourage electricity savings and stable load curves. Redistributed amounts would be applied directly to consumer invoices. The regulator would publish projected amounts to be redistributed by EDF, calculated according to current and historic nuclear production.

No information has yet been disseminated around how alternative suppliers would participate in the new scheme, or whether they would enter into long-term supply contracts with EDF. If so, a margin would be added to the reference price due to the added risk of longer-term engagements.

II) The second provision of the proposed scheme aims to encourage the development of long- and medium-term (at least 3 years) contracts “for both producers and consumers.”

These contracts could provide access to nuclear or renewable generation, with potential to share the operating risk of production assets, as these contracts value the ability of industrial partners to pay a significant upfront fee and share production risk. No further details are provided about this provision.

The proposed scheme is currently open to public comments.

Open issues and questions:

• The final price to be paid by consumers won’t be known before the proposed scheme’s delivery year, making it challenging to calculate budgets.
• Amounts to be distributed will be calculated after the consumption year, adding complexity and doubts around the transparency of the process.
• While ARENH allows for alternative suppliers to sell up to 100TWh of EDF’s nuclear power, the proposed scheme eliminates this provision and allows only EDF to sell its nuclear power. This could lead to monopolization of the market.
• Will alternative suppliers support the new mechanism?
• How will heavy electricity consumers have structured their future contracts?
• How will redistribution for industrial customers account for consumption profiles such as flexibility and off-peak hours?

For more information or for further questions, please reach out to our team at eu.operations@alfaenergy.co.uk.

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