Think-tank: Artificially low electricity prices ‘not good for EDF’ nor consumers

A road sign stands in front of the nuclear power plant in Fessenheim, France, 12 June 2018. The plant is the oldest nuclear power plant that is still in operation in France. [EPA-EFE / Patrick Seeger]

This article is part of our special report Electricity prices.

Regulated energy prices in France are one of the reasons why former state monopoly EDF loses money, says Thomas Pellerin-Carlin. Moreover, regulated tariffs are useless to protect vulnerable consumers from energy poverty and “almost never lead to low energy bills,” he argues.

Thomas Pellerin-Carlin is head of the energy centre at the Jacques Delors Institute, a think-tank based in Paris. He spoke to EURACTIV’s energy and environment editor, Frédéric Simon.

INTERVIEW HIGHLIGHTS:

  • Regulated prices protect incumbent energy operators from competition
  • Politicians have an interest to make sure energy prices are as low as possible, which makes France’s EDF lose money and build up debt
  • Regulated tariffs applicable to the entire population are inefficient to address energy poverty
  • Poor households should not be manipulated to serve the short-term interests of incumbent utilities
  • In the long run, regulated prices will act as a break to the development of renewables and demand-response

***

Why did European countries introduce regulated energy prices in the first place?

Regulated energy prices were introduced when the electricity system started to be organised as a monopoly. And when you have a monopoly, like it was the case in Europe in the 50s and the 60s, you have a possibility that the monopoly abuses its power and imposes higher prices on consumers.

To avoid this problem, states have acted in different ways. One mean of action was to nationalise the monopolies so the benefits would eventually fill public coffers. Another one of was to introduce regulated prices.

In the case of France, there were big energy projects after the Second World War: hydroelectric power dams, nuclear power stations, etc. Did regulated prices allow such projects to happen?

They were not directly linked to those projects, which were funded by the state. Regulated prices were usually introduced to make sure that prices were low, so they were not particularly useful from the point of view of those investments.

The first nuclear power plants in France and the UK were financed for military purposes, not to produce electricity. As for the other half of Europe that was dominated by the Soviet Union for 40 years, they had to follow the Soviet energy policy.

Regulated energy prices: The end of an era?

Many European countries have various types of limits on gas and electricity prices paid by consumers, a legacy inherited from the post-war period.

Who are the main beneficiaries of regulated prices today?

Incumbents.

The European Commission argues that regulated prices act as a kind of shield that protects incumbents from competition. So you believe this criticism is founded?

I think it is largely founded. What regulated prices do essentially is to maintain the status quo.

So in a country like France, regulated prices would benefit EDF, the former state monopoly…

Yes, but it may not be good for EDF. That’s the paradox: it may be good for the people who are currently managing EDF with the current business model but it is not sustainable for EDF in the medium to long term.

This is because regulated prices in France are probably set below production costs. In France and other countries where there are regulated prices for all households, politicians have an interest to make sure the prices are as low as possible. Because this can be good for them in terms of short-term political gains. For instance, in Bulgaria in 2013, the government was overthrown following threats of an increase in regulated energy prices.

However, when prices are regulated below production cost, it means that the energy company loses money. And the fact that regulated prices in France are so low is one of the reasons why EDF has a massive debt. So it’s not even good for EDF in the end.

Regulated prices are also supposed to give certainty for energy companies to make investments for the long term…

What energy companies need for long-term investment is policy predictability, as well as specific incentives (e.g. feed-in premiums).

Do regulated prices always mean lower energy bills for consumers?

It sometimes – but not always – means a low energy price. But it almost never leads to low energy bills.

There are two main drivers defining the level of your energy bill. The first is the price the end-user pays for electricity – by the way, let’s recall that between one third and two-thirds of this price is made of taxes – and the second is the amount of electricity that you consume.

So to reduce the bill, the most efficient way is not to reduce the price but to reduce consumption, through energy efficiency measures for instance.

For example, there is a new building in Strasbourg that is very energy-efficient, with renewable energy production on site. The total energy bill, including heating, for a 69m2 flat heated at 21°C is €79… per year. That is an energy bill of €6.50 a month! Near-zero energy buildings (NZEB) – this is the way to reduce our energy bills!

Price regulation is meant also to provide some certainty to the poorest households, to make sure their energy bills don’t go through the roof. So you don’t believe they provide that sort of protection?

They can provide protection in some cases. But you have to distinguish regulated tariffs for the entire population and social tariffs for vulnerable consumers and poor households. Those are two different things.

According to the European energy poverty observatory, 50 million households are experiencing energy poverty or vulnerability in Europe. This is around 10-20% of the housing market across Europe. Countries like the Czech Republic, Estonia or Slovakia have less than 5% of households in a situation of energy poverty, according to their own reports.

Countries like France or Poland are in the middle, with about 10% of the population in energy poverty. And then you have countries like Bulgaria and Greece with very high rates of energy poverty, around 30-40%.

My point here is that regulated tariffs applicable to the entire population are not the way to address energy poverty. Energy poverty should not be manipulated to serve the short-term interests of incumbent utilities.

So you’re saying there are more efficient, targeted ways of dealing with energy poverty?

Yes. The minimal approach is to get rid of regulated tariffs for the entire population but create or reinforce a social tariff for those 5 or 10% of the population who are living in difficult situations.

Then, you can go much further. France is currently experimenting with a so-called “Chèque Energie”. Rather than a social tariff, the state gives people actual money that they can use to buy energy or perform energy efficiency investments. The system is not working very well because it was poorly designed and insufficiently funded. For example, if you pay €100 per month and the Chèque Energie gives you €50 per month, you still need to pay an amount that can mean a lot for poor Europeans. But the concept is a better one than regulated tariffs.

And then if you really want to tackle energy poverty, we all know what really needs to be done – deep energy efficiency renovation. Once you live in a place that is so energy-efficient that your energy bill is below €10 per month, you de facto stop experiencing energy poverty.

That is the way forward that we are calling for in our proposal for a Social Pact for the Energy Transition, which got the support of the European Economic and Social Committee.

Looking at renewable energies, do regulated prices hinder the development of wind and solar or do they provide the stability that investors are calling for?

Renewable energy investors want stability. But you don’t get that stability by regulating the final price paid by consumers. You get stability by making sure you have a proper electricity market design and providing the proper kind of financial support for the deployment of renewables such as feed-in tariffs, premiums, auctions, etc. – all of which is already being done across Europe.

In the long run, regulated prices will act as a break to the development of renewables. Because the more renewables we have on the grid, the more we need to have flexible, dynamic prices that can change during the day, during the week or during the year.

You need this kind of flexibility to make sure that prices can go low when there is a lot of wind or a lot of sun. But also to make sure they can go a bit higher when there is a shortage of renewables and you need to lower demand at this particular moment.

EU negotiators agree ‘dynamic pricing’ of electricity

Energy companies with more than 200,000 clients will be obliged to provide households with at least one offer comprising dynamic price contracts, under an EU-level agreement reached behind closed doors last week, EURACTIV.com has learned.

Intermittency is one of the criticisms that are frequently addressed at renewables: when the wind blows, prices go down and when it stops, prices go up. Can regulated prices offer some kind of insurance to consumers against these kinds of price fluctuations?

Yes, but just like any kind of fixed tariff. If, as a consumer, you don’t want your electricity bill to be impacted by the weather forecast, you can choose to have a fixed tariff. But that doesn’t need to be a regulated tariff, it’s just a choice you make as a consumer.

There is an energy cooperative in France called EnerCoop, which has 60,000 customers. All their electricity is renewable. And they offer their customers a fixed tariff contract. But that’s not a regulated tariff, it’s just a contract with a fixed price.

Regulated prices are also seen as a break to demand-response technology. Is that indeed always the case or is there a workaround to make regulated prices and demand-response work together?

There may be an option, but I don’t see it. If you want demand-response to develop, you need dynamic prices that can fluctuate.

Then if you want to prevent prices from going through the roof, you can always install some kind of price cap. Price fluctuations don’t mean that you go from 0 to 1,000 euros – there should be a minimum and a maximum level negotiated between the customer and the service provider.

So you’re saying that getting rid of regulated prices will unleash demand-response?

I wouldn’t use the word unleash, that would be going a bit too far. But it’s clearly an element that would favour the development of demand-response.

Now, there are other things as well, including a proper supply of demand-response solutions adapted to people’s needs. And you need companies – utilities, TSOs, DSOs, or aggregators – to provide these kinds of services to people. As a consumer, I was personally never offered any such kind of service for instance.

The market is probably not mature yet.

There are a lot of elements before the market for demand-response for individual households can be considered ripe. One of them is to make sure you have dynamic prices. Another is that businesses are in a position to supply these solutions to a massive amount of people. And for that, you need big companies on board, the ones that have a large customer base.

You would probably also need smart meters installed everywhere. But people don’t always want them, as we can see currently in France with the Linky meter, which is met with scepticism by the population…

Smart meters help, but they are not a conditio sine qua non for all demand responses. In France and many others countries, we’ve had basic demand-response for decades since the introduction of the day and night electricity tariffs. And you already have demand-response that is being done manually by millions of people who programme their washing machines or their boilers to switch on after 11 pm. This has happened for decades without smart grids or smart meters.

But smart meters will be useful for the next generation of automatic demand-response solutions relying on digital technologies.

Energy execs: ‘The market for demand-response is only going to grow’

Demand-response services are still fairly new in the electricity market, but their importance is only expected to grow as power grids come under increasing strain from intermittent renewable energy sources. Andreas Flamm and Frauke Thies explain the “fundamental shift” that needs to happen in the policy landscape.

Demand-response is also necessary for electric cars, in order to avoid millions of cars charging at the same time and destabilising the grid. Otherwise, you risk a blackout. Is electric mobility another reason to end regulated prices?

Yes, but I would add some nuance. First, people won’t be charging their cars all at the same time: people work, travel at different times of the day.

Nonetheless, there is indeed a risk that people charge their electric vehicles at times when it doesn’t suit the grid – for example during a cold day in winter when there is no wind. One way of addressing that is to have dynamic prices. With a price incentive, consumers can manually choose to plug their electric vehicles at specific moments, when the price is low. And they can also decide to externalise this decision to a software.

Do you expect regulated prices to be a red line for a country like France or Hungary in the ongoing talks to reform the EU electricity market?

The current trilogue negotiations on the electricity market design could pave the way for a compromise to ensure that regulated prices are phased out after a given period of time, such as 5 or 10 years.

Of course, there is always some haggling going on. If France, Hungary or Bulgaria want to preserve their approach to regulated prices, they will need bargaining chips and give up on some other element during the trilogue negotiations, and ahead of a qualified majority vote in the Council of Ministers.

The days of regulated prices seem numbered, it seems. In short, you could argue they are from another century…

They are from the last half-century in fact. At the beginning of electrification, there were no regulated prices. The first state intervention in France happened in 1935 and we had electricity well before that. Then in the 1950s, EDF struggled against the creation of a nationally-fixed regulated tariff.

But, yes, they don’t make sense in the energy transition. That said, there are a lot of things that don’t make sense in the energy transition which are still happening. For example, the German public bank KfW is putting €750 million to build a coal power plant in Greece, which should be up and running in a few years. It doesn’t make any sense for the energy transition, but it’s happening nonetheless because of economic and political vested interests.

When Jacques Delors proposed the Energy Union idea back in 2010, he called for a Europe where we have “competition that stimulates, co-operation that strengthens, and solidarity that unites”. I believe this motto still holds true today.

We need dynamic prices to stimulate the competition that will allow integrating more renewables at a lower cost. We also need a genuine Social Pact for the Energy Transition, where cooperation and solidarity will enable to lift 50 million European families out of energy poverty through deep energy efficiency renovation.

Fuel poverty and affordable housing: Connecting the dots

There seems to be rising momentum to connect the dots between energy efficiency, fuel poverty and the EU’s broader 2030 objectives, writes Sorcha Edwards.

Subscribe to our newsletters

Subscribe