Filenews 1 August 2022
By Javier Blas
On the subject of the European energy crisis, all attention is focused on Germany and on gas from Russia. However, France and its fleet of nuclear reactors are at least as important. Indeed, the first European city to be at risk of blackouts due to the drop in temperatures at the end of the year may well be Paris, not Berlin.
As winter approaches, the outlook in France is getting more and more bleak. Electricite de France (EDF), the state-owned utility company, has only 26 of its 57 reactors in operation, with more than half of its chain undergoing emergency maintenance procedures following the discovery of cracked pipes. With atomic reactors producing the lowest share of the country's energy in the last 30 years, France is facing an electric "Waterloo".
The decline in nuclear availability is forcing France to rely more than ever on gas-fired facilities, alternate wind and hydropower, and imports. This increases the cost of electricity in the wholesale market for the whole of Europe, with French futures prices rising by almost 1,000% more than the decade-to-2020 average.
In the middle of summer, when French electricity demand hovers around 45 gigawatts per hour, this is not an insurmountable problem. But a cold winter evening, when French households can push consumption to over 80 or 90 gigawatts, could be disastrously expensive. Although the French economy is smaller than the German one, the demand for electricity in France is much greater than that of the neighbour during the winter, as households there rely more on electricity for heating and hot water.
Although EDF has promised that at least some of its reactors will be and have been connected in time ahead of the colder months, the company has a bad habit of promising more than it does in the end. The severity of winter could be key: for every degree Celsius when the temperature drops below normal, French energy demand increases by about 2.5 gigawatts per hour - a figure equivalent to the power of two nuclear power plants.
During the late snow that hit last April, the French network was forced to issue a rare orange alert - the second highest - asking households and companies to "moderate their consumption". These alerts will become common practice next winter and will most likely escalate to "red alert" indicating a risk of power outages unless families and businesses reduce demand.
Electricity traders take the risk seriously. On the wholesale market, the main one-year French baseload contract has soared to a record high of 507 euros per megawatt hour, well above German prices of €350 to €370 for the parallel contract. French retail consumers are currently protected thanks to a price cap, but businesses are fully exposed.
With the advent of winter, this will become much worse. For December, French base-load electricity is trading at over €1,000, almost double the prices in Germany, while peak load power - usually in the evenings when families gather for dinner and heating is on - changes hands at a cost of more than €2,000. In practice, this means that traders expect French electricity demand to be so high in relation to supply that so-called hourly prices will rise against the €4,000 limit set in December. The market, aware of what is coming, is trying to noticeably reduce consumption in advance, in an effort to prevent power outages. It's a costly way of trying to force high-consumption companies, such as smelters, to plan to close in December.
The French problem is spreading to the rest of Europe, including the United Kingdom. EDF, a longtime source of national pride as well as low-cost electricity exports, must buy energy to meet daily needs. Earlier this month, the French network made an emergency request to the British network for additional power — and that was in the summer, when demand is low.
In the past, EDF introduced electricity on a clean basis only for a few days a year, perhaps not at all. For example, between 2014 and 2016, France did not import electricity even one day. But as nuclear problems grew, it began to rely more and more on imports. Last year, he bought electricity from abroad for 78 days. So far this year, it has been forced to do so in the record number of 102 days.
France's markets are putting further pressure on a European electricity and gas market that is already under pressure. If French President Emmanuel Macron wants to help defuse the European energy crisis, he must focus on the interior. Repairing the EDF situation should be his top priority - well above his phone conversations with Russian President Vladimir Putin.
Paris has taken a first step by announcing the nationalisation of the company at a cost of €10 billion, although not earlier than September. Curiously, Macron has not yet created a new executive team. The company's executive director is expected to step down, but perhaps not by March 2023. The rest of the senior management team, including the executive in charge of nuclear power who has overseen the devastating performance of the past two years, appears to be safe in their work for now. Macron has also not limited the influence of trade unions within the EDF - another long-standing issue that hinders reform in the company.
Time is running out. Paris is great in autumn and winter. It will become much less attractive if the "City of Light" is forced to darken.
Source: BloombergOpinion
