IEA says France Can Liberalise Faster

The International Energy Agency (IEA) has urged the French government to take bolder steps towards competitive electricity and gas markets. France can face up to this challenge: French energy companies are well equipped to compete. The state-owned power company Electricité de France (EDF) already participates in some of the most competitive electricity markets in the world. Building on past energy policies which were successful in many respects, France today faces new pressure to reduce environmental emissions, increase the competitiveness of energy-consuming industries and introduce competition. Because France is poor in energy resources, security of supply will remain a major focus of energy policy. But security of supply need not be an obstacle to competition. French energy imports are diversified and, compared to its annual consumption, the supply of gas is underpinned by the largest amount of gas storage in Western Europe. In order to stabilise its greenhouse gas emissions at 1990 levels in 2008-2012, the government has developed a strategy to limit emissions. This plan is compatible with competition and should be implemented as planned. These IEA views appear in a report released today in Paris, Energy Policies of IEA Countries – France 2000 Review.

Review

Over the last 15 years, France has gradually liberalised its energy markets, beginning with deregulation and privatisation of the oil industry. The next industries to liberalise are the power and gas industry. The European Union’s Electricity Directive called for action to liberalise the electricity supply industry in February 1999, but this was achieved a year later, in February 2000, through the Act Relating to the Modernisation and the Development of the Public Service of Electricity (Loi de la modernisation et du développement du service public de l’électricité no. 2000-108 of 10 February 2000). The model of competition chosen by France is regulated Third Party Access, a model that is potentially fairer than the Single Buyer model that was favoured at earlier stages. The IEA commends this development.

The markets will be opened in three gradual steps that cleave to the minima required under the Directive. The basic design of the market is laid down in the new Electricity Act, and the regulatory authority has been established, but much detail remains to be determined by the regulator or through secondary legislation.

The Act contains several trading restrictions. Among these is a requirement that electricity traders operating on French soil must have generating capacity synchronously interconnected to the Western European network; for these traders, wholesale purchases of electricity for resale in the French market can be limited in relation to this capacity. Another restriction stipulates that supply contracts must be no shorter than three years. In June 2000, the European Commission took issue with this provision. The French government explained that the minimum duration of three years refers only to the length of contractual frameworks, not individual deliveries, and that the provision contains much flexibility. If there is enough flexibility to allow the development of a deep and liquid spot market, including one-off deliveries, one of the crucial ingredients of a fully competitive power market would be met.

The report released today points out that EDF is well prepared for more far-reaching competition. EDF, Europe’s biggest power company, is very active abroad and serves more than 13 million customers in 18 countries outside France. It also owns and runs more than 14 GW of generating capacity abroad. Among the countries EDF is active in are some of the world’s most competitive power markets: Spain, Sweden, the United Kingdom and Argentina.

The company has a vast incumbent advantage in France, which was not addressed in the legislation. Within the next five years, 37 of its nuclear reactors will reach the end of their depreciation period. Since the units are likely to run for another ten years or so, they will be able to generate electricity at extremely low running cost. The IEA believes that EDF can thrive in a free and open market. The company itself appears to have similar views: in 1999, EDF voluntarily opened a part of its market to competitors. To be able to transmit its competitors’ electricity at transparent prices, it developed and published a provisional transmission tariff that will remain in use until the regulatory authority and the Ministry of Industry publish the definitive transmission tariff.

Liberalisation of the gas market, due in August 2000 under the EU Gas Directive, will also be realised behind schedule. The IEA recommends that legislation be adopted and the competitive market come into effect as closely as possible to the required timetable. France’s plan for gas market opening also cleaves to the minima in the Directive; and Gaz de France (GDF) also enjoys a large incumbent advantage that is not addressed directly in the legislation.

Security of supply concerns may form part of the reason. France is indeed heavily dependent on gas imports from Algeria and Russia. However, France’s gas supply security standards are among the highest in the world. The country has one of the most diversified gas import portfolios in Western Europe. With about 10.5 bcm storage capacity and 182 mcm peak output per day, it has the largest storage capacity in relation to its annual consumption in Western Europe. The country can withstand a year-long interruption of 30% of its supplies without having to cut off firm gas customers. Given this background, the IEA considers that France can afford to adopt a more confident approach to competition, for the benefit of its domestic consumers as well as its companies. As in the electricity market, GDF and two other gas transport companies have published provisional gas transportation tariffs in August 2000 to allow application of the Gas Directive in time.

France is committed to stabilising its greenhouse gas emissions at 1990 levels by 2008-2012. Compared to current growth trends, this means a 10% reduction by 2010. France’s carbon dioxide emissions are low compared to other European countries, partly due to the country’s nuclear programme. But CO₂ emissions continue to rise, and no new nuclear plants are foreseen. A major part of France’s emissions growth is in the transport sector, in which this growth is harder to address than in other sectors. But France’s National Programme to Combat Climate Change sets out a balanced strategy to limit all emissions. The strategy promises to introduce more continuity to French policies on renewable energies and energy efficiency, and the IEA recommends its implementation on schedule.