France: Will crisis response aid investors?

The narrowest point of the English Channel between the UK and France is just under 21 miles. The gulf has felt much larger this summer due to disputes over post-Brexit border arrangements, which have caused travel misery for millions of British holidaymakers. But the differences do not stop there.

Most Brits would also look enviously at their Gallic cousins if they knew more about France’s energy market. Energy users in France are far more protected from changes in merchant power prices than those in the UK, due to subsidies and France’s majority stake in EDF. UK users are more exposed to the market.

This approach works well for French users, who benefit from lower power prices due to the country’s ageing nuclear fleet.

However, it means that developers, rather than consumers, are more exposed to the economic force of inflation. It is more becoming costly for developers to build renewable energy developments in France, and project costs are now not being covered by state-guaranteed power purchase prices.

This led to a stark warning last month. The French government said up to 6GW of wind and 7GW of solar projects in France may be cancelled due to inflation. This would further slow an energy transition that is already lagging: France is the only European Union country to miss a target of 23% renewable energy in its mix by 2020, coming in at 20%. Wind makes up 8% of the total.

The result is that France announced emergency measures in late July to help renewable energy developers. But what are they and will they work?

Emergency footing

Three of these measures are worth highlighting for wind.

The first is that renewables companies that won contracts for difference (CfD) for their projects in recent auctions will be allowed to delay starting them for 18 months and, instead, sell the power on the open market.

This is a no-brainer. It means operators can sell power for high current prices (over €200/MWh), rather than the strike prices of under €60/MWh secured in recent auctions

This should encourage developers to push on with projects now, even without the certainty of what happens when those 18 months are up. Indeed, we have seen UK offshore wind developers delaying activating CfDs to do just that. For firms operating in multiple countries, this could make France more attractive.

The second is that rising materials costs should be taken into account in power deals for future projects. Linking CfD strike prices to inflation should give firms long-term certainty, and is unlikely to be controversial with energy users. CfDs should work for both sides even if power prices end up being a little higher.

And the third is that developers would be able to increase headline capacity of projects by up to 40% before completion. In theory, it sounds good, but it also means developers need to quickly change machines or re-design their projects to take advantage. This could be costly and end up in disputes if residents and businesses feel projects are bigger and more visible that previously agreed.

There will be developers and investors that appreciate more flexibility to gain extra value from their sites, even if it is 10%-15% instead of the potential 40%.

Even so, it is a stretch to expect this to have a significant benefit this winter, as companies will still mostly be operating in a system that has been sluggish. The government has promised further crisis measures in the coming weeks.

The other big question is where consumers fit in this. Energy users in France are not facing the same pain as in some other European nations, because they are more insulated from merchant power prices and inflation. This balance will change if developers are more protected from inflation and, therefore, energy users are more exposed to inflation-linked strike prices and open markets.

The government has likely taken the view that potential consumer reactions to its emergency plans are a problem for another day, and that getting more wind and solar onto its system is the priority. It will be hoping that this is enough to tempt companies to build ahead of a challenging winter.