The amount of the wholesale price of electricity in France reached, at the end of August, 1,000 euros per megawatt hour (MWh). Faced with this devastating outbreak for household incomes and national economies, the European Union is seeking a common response. In France, the Prime Minister announced that the tariff shield for electricity (and gas) would be maintained in 2023. Explanations.
Why are wholesale prices increasing so much?
An accumulation of factors has led to the explosion in the price of electricity, which affects Europe as a whole, and does not spare France.
- economic and industrial recovery. Demand, linked to the exit from the economic crisis due to Covid-19, has been driving prices up since the end of 2021.
- The war in Ukraine. A significant share of electricity in Europe is produced from natural gas, which leads to price coupling between gas and electricity. However, the price of the first increased with the European embargo on Russian gas, then at the beginning of September (+ 30%) with the extension, for an indefinite period, of the shutdown of the Nord Stream 1 gas pipeline.
- In France, the state of the nuclear fleet. Between the meteorological conditions – the drought affected the rivers used to cool the reactors – and the aging of the infrastructures, which require maintenance operations, a large part of the nuclear fleet is shut down. Thus, at 1er September, only twenty-four of EDF’s fifty-six nuclear reactors were operational. However, France, usually self-sufficient and even an exporter, is also obliged to supply itself on the European electricity market, contributing to price pressures.
Why are electricity prices so volatile?
Since the 1990s, the European Union (EU) has gradually opened up national electricity markets to competition in order to harmonize and liberalize the European market, and better interconnect it. The European electricity transmission network now ensures security of supply and exchanges between thirty-five countries.
This market is based on a European stock exchange, EPEX Spot SE, on which megawatt hours (MWh) are traded, with prices varying by country depending on supply and demand. It constitutes a speculative place which brings together producers, suppliers and traders, who buy and sell electricity (nuclear, renewable or fossil), for immediate or deferred deliveries.
However, in this wholesale market, the price is set not according to the average cost of electricity production in Europe, but based on the “marginal” production cost of the last MWh injected into the network. In the event of low demand, nuclear or renewable installations suffice, but when demand is high, thermal power stations are used, and the cost of electricity is then based on the price of gas (or coal). Added to this is a tax on CO emissions2within the framework of the European carbon market.
Can the European Union act on prices?
Yes, the European energy ministers agreed on September 30 on emergency measures intended to limit the explosion of electricity bills.
Officials validated proposals presented in mid-September by the European Commission, aimed at imposing a reduction in electricity demand “by at least 5%” rush hour.
They also put a cap on the income of electricity producers from nuclear and renewables (wind, solar, hydroelectric), which reap exceptional profits by selling their production at a price much higher than their production costs. This ceiling is set at 180 euros per megawatt hour and the difference between this level and the wholesale market price must be recovered by the States to be redistributed to households and businesses. A “temporary solidarity contribution” also applies to producers and distributors of gas, coal and oil.
But a majority of Member States (fifteen, including France, Belgium, Italy and Spain) believe that we still have to tackle the “most serious problem”, by capping wholesale gas prices on the European market. Germany, which was the country most dependent on Russian gas, has also so far rejected the idea.
These measures should be discussed at a European summit on Friday October 7 in Prague.
Do the French pay for electricity at the European price?
Not completely, despite a very clear increase. “Only part of the kilowatt-hours is bought at the ‘high price’ on the wholesale market”, explains to Agence France-Presse (AFP) Patrice Geoffron, Professor of Economics at Paris Dauphine-PSL University and Director of the Center for Geopolitics of Energy and Raw Materials. The rest “corresponds to nuclear generation, the cost of which is well below the wholesale price level”. Prices would, however, be much more contained if the nuclear fleet was able to operate at full capacity.
Furthermore, French consumers’ bills are not directly indexed to wholesale market prices, but to tariffs regulated by the State. But he is protective. In September 2021, the government of Jean Castex thus implemented a “tariff shield” limiting the rise in the downstream price to 4%.
It goes through a double mechanism:
- A tax reduction. The domestic tax on final electricity consumption (TICFE) was reduced from 22.50 euros per MWh to 50 cents on 1er February in order to limit the increase in the regulated tariff.
- A reorientation of nuclear power. The State has forced EDF to increase by 20%, i.e. from 100 TWh to 120 TWh in 2022, the volume of its nuclear production sold to its competitors at low prices by Regulated Access to Historic Nuclear Electricity. In compensation, the price invoiced for this reserved electricity fell from 42 euros to 46.20 euros per MWh.
By comparison, UK regulated prices are set to rise steeply, by 80% on 1er october.
In France, the crisis could fade more quickly, but depending on uncertain factors. “Our gas stock is pretty good. If we manage to relaunch nuclear power, if the weather conditions are good enough for wind power, and if the State maintains the tariff shield, this should limit the damage, but it is difficult to predict.delays Carine Sebi, economist at Grenoble School of Management.
Will the tariff shield be renewed in 2023?
The Prime Minister, Elisabeth Borne, announced on September 14 that the tariff shield would be renewed in 2023 and that the increase in electricity prices would be limited to 15% – just like that of gas – for “all households, condominiums, social housing, small businesses and the smallest municipalities”.
The electricity price cap measures cost, according to Bercy, 10.6 billion euros to the State for 2022 – and, in total, with the gas price freeze and the pump discount on fuels , 24 billion euros, or the equivalent of 1% of GDP. In 2023, according to the Minister of the Economy, Bruno Le Maire, the system will cost public finances “11 billion euros for gas, 5 billion euros for electricity”.
Furthermore, the Prime Minister announced the payment of a new energy check which will be paid “exceptional”, ” by the end of the year “to “12 million of the most modest households, or four out of ten households”.
As a consumer, how can you reduce your energy bill?
For individuals who want to reduce the impact of price increases, various solutions exist, at different scales, timescales and costs.
Adopt the right gestures. Rising electricity prices particularly affect households that use it as a means of heating, and winter temperatures rhyme with bills that hurt. “The only solution is to change behavior, and for example go from 22°C to 20°C ambient temperature, knowing that the recommendation is 19°C”, explains Carine Sebi, economist at Grenoble School of Management (GEM) and specialist in the energy sector. Lower the thermostat by 1°C amounts to saving 7% on their heating bill. Finally, it is possible to make valuable savings by only activating your water heater at reduced time slots, and by reducing the use of certain energy-intensive equipment, such as clothes dryers.
Equip yourself well. Major household appliances (refrigerators, washing machines, dryers, etc.) consume most of their energy during use, hence the interest in replacing old models with recent models. “We must choose the most economical, even if we will not always save as much money as CO2 », recognizes Sophie Attali, vice-president of the eco-responsible shopping guide “Topten”. Other good choices: ban halogen bulbs and aquariums, favor refrigerators without a freezer compartment or opt for a small water heater.
Invest. Doors, windows, walls… “You have to isolate first. It’s nonsense to try to heat rooms that don’t retain heat.”, recalls Sophie Attali. Many financial aids for thermal renovation exist. Another solution: opt for a more efficient heating system, such as heat pumps, which are less expensive to use and therefore economical in the long term.
Update Wednesday, September 14: addition of Elisabeth Borne’s announcements on the extension of the tariff shield.