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09/12/2016

The game behind France’s carbon price floor

Energy

The game behind France’s carbon price floor

Describing Russian air strikes in Syria as "war crimes", French President François Hollande said it was still necessary to talk with Moscow.

[Parti Socialiste/Flickr]

The carbon pricing measures announced by French President François Hollande will unfairly benefit EDF, the energy company’s competitors have said.  EurActiv’s partner Journal de l’Environnement reports.

Faced with falling prices in Europe, forced to spend tens of billions of euros modernising its power stations, committed to buying nuclear reactors from Areva and instructed by the EU to deploy 35 million smart meters, the French electrical giant EDF is experiencing one of the most difficult periods of its history.

This situation is exacerbated by the costly construction of two new nuclear reactors at Hinkley Point in the United Kingdom. Certain economic observers, like Jean Peyrelevade, the former boss of French bank Crédit Lyonnais, believes the former state monopoly may even go under.

Anything to save EDF

Conscious of the gravity of the situation, Paris is prepared to do whatever it takes to save the company. Already, the government plans to underwrite 75% of EDF’s next capital increase, at a cost of €3 billion to the taxpayer. But the dividend demanded by the Ministry of Economy will now be paid in free shares, not in hard cash.

EDF will shed €10 billion in assets and tighten its belt, somewhat contradicting its large investment programme. The energy giant will also open up the capital of one its subsidiaries, the electricity transport network manager RTE, by the end of the year.

Unilateral initiative

More unexpected is the company’s benefitting from the EU Emissions Trading System (ETS). President Hollande announced the changes to France’s carbon pricing policy at the launch of the French environmental conference on 25 April.

In his opening speech, Hollande announced that France would “unilaterally” place a price on carbon. “This price floor will increase the visibility of all the investors and will favour the use of gas over coal in the electricity sector,” Hollande said.

Three weeks later, Ségolène Royal, the French minister for ecology, put this price at €30 per tonne of greenhouse gas. But the final decision on the price will be decided at the vote on the French finance bill.

Raising the European carbon price

What is the purpose of this five-fold increase to the current quota price? Officially, it is to put pressure on the other ETS countries to increase the carbon quota price and make the EU carbon market more efficient. This, it is hoped, will help the bloc reduce its industrial greenhouse gas emissions.

The French government has also tasked Pascal Canfin (the director general of WWF), Alain Grandjean (an economist) and Gérard Mestrallet (the president of the administrative council of the energy company Engie) with finding a way to open up a CO2 price corridor in Europe.

But such an active approach from the French government is likely to be in vain, as the ETS is a highly controversial topic at the European level. And the chances of this manoeuvre changing the lines of the debate are minimal.

Hidden benefits for EDF and foreign companies

The French government knows this, and some observers see an ulterior motive behind this push for a carbon price floor.

“By pushing up the cost of thermal energy generation from combustion in France, the government is giving a clear advantage to EDF [which relies heavily on nuclear power, ed.] and foreign energy producers,” said Fabien Choné, the director-general of Direct Energie.

According to Choné, the profitability of three power stations (including two that are not yet operational) could be directly threatened by the carbon price floor. “But we will have to see how it is implemented,” he added.

Engie shares the same point of view as the French National Association of Alternative Retail Energy Providers (ANODE). “This measure will above all penalise French gas power stations,” said Anne Chassagnette, the director of environmental responsibility at the French-Belgian energy company.

With the falling price of gas, Engie can keep its four ultra-modern gas power stations running at near full capacity. The company directed by Isabelle Kocher hopes to make these power stations even more profitable by having them ready to produce during peak periods, through the future capacity mechanism. But this business plan may be threatened by the French carbon pricing initiative.