IEA Commends the Framework for Competition in French Gas and Electricity Markets but Cautions that Challenges Remain

“French energy policy has been successful achieving energy security, economic growth and environment protection, with a centralised approach using strong government involvement” said Claude Mandil, Executive Director of the International Energy Agency (IEA), today in Paris at the launch of “Energy Policies of IEA Countries – France 2004 Review. “The main challenge is now to adapt to a changing European energy context in which competition and an increased international scope play important roles”.

The French government has taken commendable steps towards a sound legal and regulatory framework for liberalized energy markets. Nevertheless, challenges remain, in particular incumbent market power, which could threaten the success of liberalisation. Reversing the course of GHG emissions is also a major challenge. Nuclear power could continue to play a beneficial role, although any new plants should be developed under market conditions.

Liberalised Gas and Electricity Markets
France has taken a number of steps to establish a sound legal and regulatory framework for a liberalised market. It has expanded supplier choice in line with the EU Directives, created a largely independent transmission system operator (TSO), introduced non-discriminatory third-party access to the network, and developed a strong regulator, although the government still has the final authority in tariff-setting. Transforming the statutes of the state-owned utilities to those of ordinary companies so they can compete on a level playing field is also a positive development.

At the same time, several outstanding issues remain. Éléctricité de France (EDF) currently generates more than 90% of French electricity, giving it market dominance that could potentially influence price levels and deter new entrants. As part of its energy security mandate, the government has the option to launch tender offers or deny plant authorisations to achieve a desired generating portfolio under the Long-Term Investment Programme. Care should be taken that these options do not create market distortions which could lead to economic inefficiency and higher prices for consumers. Given France’s substantial electricity and natural gas trade with its neighbours, all questions arising from market liberalisation must be dealt with in a regional context. Increased international connections would be beneficial in this regard as a way to mitigate incumbent market power and enhance energy security.

Climate Change Strategies
Under the EU burden-sharing agreement, France is obliged to keep its GHG emissions at 1990 levels during the Kyoto Protocol’s 2008-2012 commitment period. Current emission levels and government projections indicate emissions will rise well above this level under business-as-usual conditions and hence government action is required. Reducing GHG emissions is one of the greatest challenges for French energy policy, especially given the limited scope of emission reduction potential in the power sector and the continuing growth of transport emissions. The first Climate Plan, released in 2000, was deemed insufficient to curb emissions by the required amount and release of a new Plan has been delayed. France is encouraged to finalise and release the new Plan and begin implementation of its measures as soon as possible.

The government has already announced several highly ambitious programmes to cut emissions. These include limiting final energy consumption to 2004 levels by 2015, building up to 10,000 MW of wind power by 2010 and reducing CO2 emissions by 75% by 2050. The government should be commended for its vision in addressing climate change. At the same time, a comprehensive and credible assessment of the costs involved in meeting these challenging targets should be developed and properly communicated to the public.

Energy Efficiency and Renewable Energy
Increased energy efficiency and renewable energy production promise to lower emissions and enhance energy security. Proper implementation of policy measures in these areas is crucial. The primary tool for energy efficiency in France is the White Certificates programme. Under this scheme, energy efficiency projects receive certificates which are valued and traded in a marketplace. France is encouraged to proceed with this promising initiative taking care to minimise potentially burdensome administrative costs through simplification and standardisation wherever possible.

The government supports renewable energy through both feed-in tariffs and tender offers and, as such will have the advantages and disadvantages of both support schemes. Care should be taken that the feed-in tariffs are regularly reduced to encourage efficiency gains and that the tender offers result in actual installed capacity. Local siting remains a problem for renewable facilities and steps to streamline the authorisation process would be welcome.

Nuclear Power
Nuclear power is crucial for France. In 2002, nuclear accounted for 43% of total primary energy supply and 79% of electricity generation. France has developed a substantial technological resource in this field and the government would like to maintain this capability as an important requirement in keeping the nuclear option open. Substantial government R&D in this field and the marketing and construction of French nuclear plants abroad will help in this regard. The government has also indicated that it would agree to a domestic “demonstration” unit for the European Pressurised Reactor (EPR) to be completed around 2012. Any such plant should be built under market conditions.