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EnergytransitionpoliciesinFranceandtheirimpactonelectricitygeneration

–DRAFTVERSION–SébastienPhilippesp6@princeton.eduNuclearFuturesLaboratoryDepartmentofMechanicalandAerospaceEngineering,PrincetonUniversityJanuary12,2016Abstract:FranceexperiencedrecentlytheimportanttransformationofitsenergyandenvironmentalpolicythroughtheentryintoforceoftheEnergyTransitionforGreenGrowthActandtherecentParisagreementbetweenthepartiestotheUnitedNationsFrameworkConventiononClimateChange.Inthispaper,westudytheeconomicimplicationsofthistransformationonelectricitygeneration.Inparticular,wefocusontheeconomicrationaleofconductingFranceenergytransitionwithanextraordinaryportfolioofmarket-basedpoliciesincludingfeed-intariffs,auctions,carbonpricingandtheEuropeanUnioncapandtradescheme.Wefindthatsuchapproachcanproducemoreeconomicinefficienciesthanthesoleapplicationofacarbonpricingpolicy.Weemphasized,however,thattheuncertaintiesintheabilityofthecurrentwholesaleandthenewlycreatedcapacitymarketstoaddressbotheconomicalandphysicalrequirementsofsecurityofsupply,favoredthecontinuationofconservative(andriskadverse)policies.Finally,wediscussthestructureofthefutureelectricitymixexpectedtoemergefromthecurrentpoliciesandquestionitssocialoptimality.

IntroductionInDecemberof2015,thepartiestotheUnitedNationsFrameworkConventiononClimateChangeagreedduringthe21stsessionheldinParis(theCOP21)to“holdtheincreaseintheglobalaveragetemperaturetowellbelow2°Cabovepre-industriallevelsandtopursueeffortstolimitthetemperatureincreaseto1.5°Cabovepre-industriallevels,recognizingthatthiswouldsignificantlyreducetherisksandimpactsofclimatechange.”1ThisagreementwasnotonlyaninternationaldiplomaticsuccessforFrance,butalsothepinnacleofathreeyearsdomesticprocess,thatsawtheimportanttransformationofFrenchenergyandenvironmentalpolicythroughtheentryintoforceoftheEnergyTransitionforGreenGrowthAct(ETGGAct),2afewmonthsbeforetheCOP21.1UnitedNations,“AdoptionoftheParisAgreement,”FrameworkConventiononClimateChange,ConferenceoftheParties,Twenty-firstsession,FCCC/CP/2015/L.9,12December2015.2Loirelativeàlatransitionénergétiquepourlacroissanceverte,n°2015-992,17août2015.(EnergyTransitionforGreenGrowthAct,17August2015).

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ThepoliticalvalueoftheParisagreementwillcertainlyhelptoconsolidatethepublicacceptanceoftheActanditslong-termobjectivestoaccelerateFrance’senergytransitionandreductionofgreenhousegas(GHG)emissions.TheobjectivesaretoreduceFranceGHGemissionsby40%in2030comparedto1990,3increasetheshareofrenewableenergysourcesto32%ofthefinalenergyconsumptionand40%oftheelectricityconsumptionin2030,reducethefossilfuelsconsumptionby30%in2030aswellasthefinalenergyconsumptionby50%in2050comparedto2012.TheActalsopushesforthediversificationofelectricityproductionbyreducingtheshareofnuclearpowerto50%by2025andbycappingthenuclearpowercapacitytothecurrentlevelof62.3gigawattelectrical(GWe).Furthermore,whatwasnotadvertisedmuchbythegovernment,butmaybethemostimportanteconomicmeasureoftheAct,isthedecisiontoincreasesignificantlytheFrenchcarbontaxalsoreferredasthe“ClimateandEnergyContribution”(CCE).TheCCE,createdbythesamegovernmentin2014,isacomponentofadomestictaxontheconsumptionofenergyproducts(TICPE),4,5andisappliedthroughallsectorsoftheeconomyincludingelectricitygenerationandtransportation.6Atthetimeofitscreation,itintroducedcarbonpricingatarelativelylow(andpoliticallybenign)levelof€7/tCO2whichwastobeslowlyraisedto€14.5/tCO2in2015and€22/tCO2in2016.ButinJuly2015,throughanamendmentoftheETGGActsupportedbythesocialists,ecologistsandcentrists,thedecisionwastakentoincreasetheCCEevenfurtherto€56/tCO2in2020and€100/tCO2in2030.TogetherthesedecisionshavethepotentialtoreshapegreatlythesupplyofelectricityinFrance.Itwillnotbethefirsttimethatthecountryfacessuchimportanttransformation,ascanbeseenbytheevolutionofgrosselectricproductionfrom1973to1990andthemassivedevelopmentofnuclearpower3Notethatin2012,GHGemissionswerealready12%lessthantheir1990level.See:Ministèredel’écologie,dudevelopmentdurableetdel’énergie,“InventairedesémissionsdegazàeffetdeserredelaFrance:lesrésultats1990-2012.”17avril2014,http://www.developpement-durable.gouv.fr/Inventaire-des-emissions-de-gaz-a.html4Ministèredel’économieetdesfinances,“Présentationdesdispositionslégislativesadoptéesdanslecadredesloisdefinancespour2014etdefinancesrectificativepour2013concernantlafiscalitéénergétiqueetenvironnementale,”12mars2014.http://circulaire.legifrance.gouv.fr/pdf/2014/03/cir_38051.pdf5TheTICPE,TaxInterieursurlaconsommationdesproduitsenergetiques,wasformallyafueltax.6Therearesomeexemptions,however,withinthetransportationsector.Ministèredel’écologie,dudevelopmentdurableetdel’énergie,“Lafiscalitédesproduitspétroliersdanslesloisdefinancesrectificativepour2014(LFR)etloidefinancespour2015(LFI),”January13,2015.

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duringthattime(Figure1).Buttoday’scontextiscertainlyverydifferent.Themainreasonbeingthatelectricityproductionanddistributionisnotastatemonopolyanymore.ThesectorwasslowlytransformedoverthelasttwentyyearsintoaregulatedmarketthatcontinuestodayitsliberalizationandintegrationwithEuropeanpartnersunderthedirectivesoftheEuropeanUnion.7Hence,topursueitsenergytransition,Francewillneedtoimplementsoundandefficientmarketbasedeconomicpolicies.Bymakingthechoiceofastrongcarbonpricingpolicy,theFrenchgovernmenthaschosenwhatisrecognizedasthemostefficientandfirstbestpolicy,butatthesametime,ithasnotyetgaveuponexistingFeed-InTariffsandauctionpoliciesinheritedfromitspredecessors.Theeffectsofsuchanextraordinaryportfolioofeconomicmeasuresisthereforeofparticularinterestandisthefocusofthisstudy.

Figure1:StructureofgrosselectricityproductioninFrancein1973,1990and2014.Thecountrygrossproductionreached556TWhin2014ofwhich77.5%wassuppliedbynuclearpower.(Thermiqueclassiquetranslatesinfossilfuelfiredplants,EolieninWindPower,NucléaireinNuclear,HydrauliqueinHydro-electricpower,PhotovoltaïqueinPV).

7Ministèredel’écologie,dudevelopmentdurableetdel’énergie,“Lesétapesdel’ouvertureàlaconcurrencedumarchédel’électricité”(StepsintheopeningtocompetitionoftheFrenchelectricitymarket),2007.http://www.developpement-durable.gouv.fr/Les-etapes-de-l-ouverture-a-la.html

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Figure2:Structureofinstalledelectricitygenerationcapacityasof12/31/2014

Inthispaper,wedevelopanunderstandingoftheeconomicrationaleanddegreeofefficiencyofconductingtheenergytransitionwithaportfolioofpolicies,ratherthansimplyachievethemultipleobjectivesofemissionabatementanddiversificationofelectricityproduction(includingthelargedeploymentofrenewables)throughacarbonpricingpolicyalone.Next,wepointoutthatthecurrentstructureoftheelectricitymarket,maynotbeadequatetosustaintheenergytransitiononcethepenetrationofrenewableshasachievedahighlevelandelectricityismostlysuppliedwithtechnologythathaveazero(renewable)ornearzero(nuclear)marginalcostofproducingonemegawatt-hour(MWh).Finally,wediscussthelikelyfuturecompositionoftheFrenchelectricitymixintheyear2030,thetimehorizonoftheETGGAct,andwhetherornotthisoutcomewillbesociallyoptimal.

EconomicpoliciesforthepromotionofrenewablesinFranceThedevelopmentofpoliciestoactivelypromoterenewableenergiesinFrancestartedadecadeago,andassincebeenevolvingrapidly.ThefirststepinthisdevelopmentwasthePOPEAct.8IthadforobjectivestoincreaseFranceenergyindependenceandsecurityofsupplybyencouragingenergysavingsanddiversifyingelectricityproductionwithprioritiesgiventorenewableandlowcarbonemissiontechnologiestoaddressclimatechange.Theactestablished,forthefirsttime,renewablesenergycapacitytargets.Thesetargets,setinthe2006Programmationpluriannuelledesinvestissementsdeproductiond’électricité(PluriannualProgramationofinvestmentsinelectricityproduction,PPIhereafter),8Loideprogrammefixantlesorientationsdelapolitiqueénergétique,n°2005-781,13juillet2005.(Planninglawsettingtheorientationsoftheenergypolicy).

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arenotonlyobjectivesforinvestmentsbutalsoceilingsbeyondwhichnofurthercapacitycanbeinstalled.ItwasdecidedthatinvestmentsinrenewablescapacitywouldbeencouragedthroughaFeed-InTariffs(FITs)policy.FITswereintroducedin2006forwindenergyandin2009forsolarPV.Pricesareguaranteedforacertainperiodoftime,usuallytentotwentyyears,dependingonthetechnology.Duringthattime,EDF(ElectricitédeFrance,thehistoricalproducerofelectricityandformerstatemonopoleinFrance,nowaprivatecompanyownedat85%bythestate),hastheobligationtobuytheelectricityproducedbyrenewablesatafixedpricesetbythegovernment(usuallywellabovethemarketspotprice).EDFisthenreimbursedthroughaso-called“contribution”,theCSPE(contributionauservicepublicdel'électricité),whichischargeddirectlytotheconsumerelectricitybill.In2016,theCSPE,setat€22.5/MWh,representsabout16%ofanaverageelectricitybill.9Until2015,theCSPEcouldn’texceed€550,000peryearforthelargestconsumers,thusplacingthecostofthedevelopmentofrenewablesalmostentirelyonsmallconsumers.Thisunequaltreatmentwillbeaddressedin2016,withtheCSPEbeingintegratedinanexistingtax,theTICFE(InteriorTaxonFinalElectricityconsumption,historicallyonlyapplicabletolargeelectricityconsumers),liberalizingthiscontributiontothedevelopmentofrenewablestoallconsumersindependentlyoftheirtotalconsumption.10Itisimportanttonotethatuntilthegovernmentintroducedcarbonpricingin2014,onlyelectricityconsumerssupportedthedevelopmentofrenewables,evenifelectricityproduction,largelydominatedbynuclearpower,wasnotalargeemitterofcarbon(lessthan12%ofallemissionsin2012).11Therecentpoliticaldecisiontosignificantlyincreasethecarbontaxwillshiftsomeofthecostsburdenontheindustriesaswellasothersectorsoftheeconomy.Fromtheeconomicstandpoint,thechoiceofaFITpolicycoupledwithacapacitycapnotonlyreducesuncertaintiesinthedecisionstoinvest,butalsopreventsthedevelopmentofovercapacityandplacesalimitonthecoststoconsumersiftheFITweresettoohigh.TheeffectsofthepolicyandthedifficultytosetthecorrectFIT9TwothirdoftheCSPEfinancethedeploymentofrenewableenergy,therestcontributestotariffequalizationacrossthecountry(sametariffforallindependentofwerepeoplelive)andsocialcosts(subsidytolowincomehouseholds).See:http://www.lesechos.fr/industrie-services/energie-environnement/021481006103-le-gaz-et-les-carburants-vont-payer-pour-le-solaire-1175546.php?O86AhwcoBDJu9aWt.9910Electricityintensiveindustriesandsometransportindustries(train,metro,tramway…)willhaveaccesstoalowertaxlevel,however.See:Douanes,“Réformedelataxeintérieuresurlaconsommationfinaled’électricité(TICFE)”,December31,2015,http://www.douane.gouv.fr/articles/a12667-reforme-de-la-taxe-interieure-sur-la-consommation-finale-d-electricite-ticfe11Seepage21:http://www.developpement-durable.gouv.fr/IMG/pdf/Chiffres_cles_du_climat_en_France_et_dans_le_monde_2015.pdf

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pricecorrespondingtothedesiredrenewablecapacitycanbestudiedbylookingatthedeploymentofwindandphotovoltaic(PV)electricityproductioninFrancesince2008(Figure3).Forwindpower,twodifferentobjectivesweresetin2009:theinstallationof19000MWand6000MWofonshoreandoffshoreprojectsby2020.12FITforonshorewindpowerguaranteesarevenueof€82/MWhforthefirst10yearsofproductionfollowedbyapricebetween€28/MWhand€82/MWhforthenext5years,dependingontheperformance(hoursofproductionperyear)inthefirst10years.ThisFITmechanism,readjustedafter10years,encouragestheindustrytopickthebestsitestoinstalltheirwindturbinesandmaximizetheirproduction.13However,aswecanseeonFigure3,thecurrentinstalledcapacityiswellbelowtheexpectedtargetandasofJanuary2016,nooffshorewindcapacitywasinstalled.TheoriginalFITpriceof~€130/MWhforoffshorewindpowerdidnottriggeranyinvestmentandthepolicywasreplacedin2012byanauctionmechanism.Consequently,3000MWofoffshoreprojectswerelaunchedatapriceof~€200/MWh.14ThisshiftfromFITtoauctionconfirmstheheterogeneityofwindpowergenerationandtheprofounddifferenceinonshoreandoffshoretechnologies,whichcouldhavebeenpredictedbythegovernment.InthecaseofPV,theoppositehappened.AhighFITresultedintheinstallationofalargerthanexpectedcapacityandtheobjectivessetinthe2009PPIfor2020(5400MW)werealreadyreachedin2015forcingthegovernmenttoincreasethecapto8000MWby2020.Inbothcases(windandPV),mismatchbetweenrenewablecapacityinstallationandFITisinefficientfromtheeconomicstandpoint,andresultindeadweightlossessupportedbyconsumers.15Moreover,itshowsthatFITsneeddynamicadjustmentmechanismstopreventimportantpricingmistakes,whichmaybetheresultsofa

12Ministèredel’Ecologie,del’Energie,duDévelopementDurableetdel’AménagementduTerritoire,“Programmationpluriannuelledesinvestissementsdeproductiond’électricité.Période2009–2020,”2009.(PluriannualPlanofElectricityProductionInvestments).http://www.developpement-durable.gouv.fr/IMG/pdf/ppi_elec_2009.pdf13LucyButlerandKarstenNeuhoff,“Comparisonoffeed-intariff,quotaandauctionmechanismstosupportwindpowerdevelopment,”RenewableEnergy,Volume33,Issue8,August2008,Pages1854-1867,http://dx.doi.org/10.1016/j.renene.2007.10.008.14LeFigaroEconomie,“Énergie:l'éolienenmerdéfendsonpotentiel,”01/12/2014,http://www.lefigaro.fr/societes/2014/12/01/20005-20141201ARTFIG00195-energie-l-eolien-en-mer-defend-son-potentiel.php15RichardSchmalensee,“Evaluatingpoliciestoincreaseelectricitygenerationfromrenewableenergy,”ReviewofEnvironmentalEconomicsandPolicy6.1(2012):45-64.

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lakeofinformationabouttechnologydevelopmentanddeploymentcostsaswellasperformanceinthelongrun.In2016,theFITpolicywillbereplacedbyafeed-inpremium(FIP)schemesothatproducerswithinstalledcapacityabove500kWwillberequiredtodirectlyselltheirelectricityonthewholesalemarket.UnderthisnewFIPpolicy,producerswillreceiveapremiumcoveringthedifferencebetweenthemarketspotpriceandformerFITprice.ThistransitionfromFITtoFIPwasencouragedbytheEuropeancommissiontofacilitatetheintegrationofrenewablesinthewholesaleelectricitymarket,whichisthemajorbenefitsofFIP,16andacceleratethedevelopmentofelectricityaggregators.17TheFrenchgovernmentinlinewiththeobjectivesoftheETGGActisexpectedtosetnewtargetsforrenewablecapacity.Currentdiscussionsenvisioned24,000MWofonshorewindandPVin2018,andbetween36,000to43,000MWin2023.18ThecontinuationofthisFIT/FIPpolicyseemsatodd,however,withthepursuitofamoreaggressivecarbonpricingpolicy.Thus,wewilltrytounderstandnow,ifbothpoliciescancomplementeachother,andifso,how.Onthecontrary,iftheyaretobesimplyredundantandeconomicallyinefficient,wewanttounderstandwhatwouldbethebestalternativepolicy.

16JulietaSchallenberg-RodriguezandReinhardHaas,“Fixedfeed-intariffversuspremium:AreviewofthecurrentSpanishsystem,”RenewableandSustainableEnergyReviews,Volume16,Issue1,2012,Pages293-305.17EuropeanCommission,Guidanceforrenewablessupportschemes,2013.https://ec.europa.eu/energy/en/topics/renewable-energy/support-schemes18SciencesetAvenir,“Climat:legouvernementfixedenouveauxobjectifspourlesénergiesrenouvelables,”11/13/2015.http://www.sciencesetavenir.fr/nature-environnement/20151113.AFP6468/climat-le-gouvernement-fixe-de-nouveaux-objectifs-pour-les-energies-renouvelables.html

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Figure3:EvolutionofinstalledcapacityforwindandPVelectricityproduction.Solidlinesaretrajectoriesofinstalledcapacities,diamondsrepresentthegovernment’soriginaltargets.19

19Graphanddatafrom:CommissariatGénéralauDévelopmentDurable,“Tableaudebord:éolien,”ObservationsetStatistiques,702,November2015;andCommissariatGénéralauDévelopmentDurable,“Tableaudebord:solairephotovoltaïque,”ObservationsetStatistiques,701,November2015,

Targets

Targets

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TheeffectsofconcurrentFIT/FIPandcarbonpricingpoliciesTheintroductionofrelativelyhighcarbonpricingintheFrenchfiscallegislation,beyondwhatalreadyexistedattheEuropeanUnion(EU)level,shouldhaveasignificantimpactonelectricityproductionandonCO2emissions.20Carbonpricing(orcarbontax)leadstotheoptimalamountofabatementifitisappliedtoallsectorsoftheeconomyandisequaltothesocialcostofcarbon.Forelectricityproductionithastheeffectofchangingthemeritordercurveofelectricitysupply.Byincreasingthecarbonpricefrom€14.5/tCO2in2015to€100/tCO2in2030,21andassumingaverageemissionslevelof0.96t/MWhforcoal,0.67t/MWhforoil,and0.46t/MWhforgasfiredplant,22themarginalcostofsupplyingoneMWhofelectricitywillincreaseforcoal,oilandgaspowerplantsrespectivelyby€82,€57and€39by2030.Demandforelectricitybeingratherinelastic,thepriceforelectricityshouldrisesignificantly.23SowhatwillbetheeffectsofthisnewpolicyonthemeritorderandconsequentlyontheelectricityspotpriceinFrance?Asshowninfigures1and2,fossilfuelspowerplantsrepresent19%oftheinstalledcapacitybutonly6%ofthetotalgrossproduction.Theseplantsareusuallyturnedontoaddresswintershoulderandpeakdemand.HighcarbonpricingwillcertainlymakecoalandoilplantslesseconomicalandmoveCCGTplantstobecomethemarginalsupplier.Thepricedifference

20NotethatacarbonpricealreadyexistedinFranceundertheEUEmissionsTradingSystem.Theschemefailedhowevertoproduceasignificantpriceforcarbon(wellunder€10/tCO2)andhasledtofurtherinefficacyintheEUabilitytoreduceitscarbonemissions,see:RichardSchmalensee,“Evaluatingpoliciestoincreaseelectricitygenerationfromrenewableenergy.”TheoutcomeoftheCOP21couldputfurtherpressureontheEUtoreformtheETScapandtradesystem,see:CarbonPulse,“EUshouldrevisititsclimatepolicies,saySwedishlawmakers,”January7,2016.http://carbon-pulse.com/13967/21ThesefiguresaresignificantlyhigherthanwhatarecurrentlyusedbytheUSEnvironmentalProtectionAgency.See:InteragencyWorkingGrouponSocialCostofCarbon,“TechnicalUpdateoftheSocialCostofCarbonforRegulatoryImpactAnalysis-UnderExecutiveOrder12866,”2015.https://www.whitehouse.gov/sites/default/files/omb/inforeg/scc-tsd-final-july-2015.pdf.ButlessthanwhatisinplaceinSweden,$125/tCO2,onhalfofitsCO2emissions,see:GernotWagneretal.,“Energypolicy:Pushrenewablestospurcarbonpricing,”Nature,525,3September2015,p.27.22Realtimeemissionsareavailableonline:RTE,“ÉmissionsdeCO2parkWhproduitenFrance”,http://www.rte-france.com/fr/eco2mix/eco2mix-co223Asacomparison,theyearlyaverageDay-Aheadbaseprice(EPEXSPOT)inFrancein2015was€38.48/MWh.See:Mondovisione,“EPEXSPOTReachesIn2015TheHighestSpotPowerExchangeVolume,”01/08/2016.http://www.mondovisione.com/media-and-resources/news/epex-spot-reaches-in-2015-the-highest-spot-power-exchange-volume-ever/

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betweenoffpeakandpeakdemandshouldgrowoftheorderofthecarbonpriceeffectonthefirstgasplanttobedispatchedtomeetdemand.Thispriceincreaseshoulddrivefurtherinstallationofrenewablesaslongastheirminimumlongrunaveragecostislowerthanthemarketpriceandtheplantscanbeprofitable.Ifthecarbonpricingissetcorrectlytothesocialcostofcarbon,thentheshareoftechnologiesthatdonotemitCO2intheelectricitymixshouldreachanoptimalsocialequilibrium.ThisalsomeansthatrenewablesandnuclearplantswhichemitsvirtuallynoCO2willbedirectlycompetingwitheachother(andeventuallywithfossilfueltechnologiestogetherwithcarboncaptureandstorage).Concurrentlytotheeffectsintroducedbycarbonpricing,thegovernmentFIPpolicywillalsocontinuetohaveanimpactonthemeritordercurve.Theintroductionofsubsidizedrenewablesthathavezeromarginalcostisshiftingthesupplycurvebyanamountequaltotherenewablegeneration(Figure4).Thiseffectreducesthespotmarketpricebypushingtechnologieswiththehighestmarginalcostoutofthesupplystack.ThusiftheFIPisincorrectlyevaluated,gasfiredplantscouldforexampleclosebeforethecarbonpricingstartshavinganeffectonthemeritorder(becausetheywouldneverbecalled).24MaintainingtheFIPpolicyunderacarbonpricingpolicycouldleadtoadditionalinefficienciesandincreasescostsforconsumers(forexample,iftheFIPcapacitytargetiscappedatalevelthatistoolowcomparedtotheoptimalrenewablelevelunderthecarbonpricingpolicy).Thusitseems,atfirst,thatthebeststrategyistoslowlyphaseouttheFIT/FIPpolicyasthecarbonpriceincreasesandreachesthesocialcostofcarbon.However,weshallstresswhyitmayberiskytoremoveaswellthecaponthetotalinstalledrenewablescapacity.Thereasonbeingtwofolds:1)Renewablesaremainlyintermittentsourcesofelectricity,thusdispatchablesourcesmustbekeptatalltimetoensuresecurityofsupplyandstabilityofthegridintensionandfrequency.Unlessofcourse,renewablesaggregatorsbecomeeventuallyabletoguaranteesecurityofsupply(hopefullynotatthecostofovercapacity).2)WhenFIT/FIPpoliciescometoanend,theprofitabilityofrenewableswilldependonrelativelyhighspotmarketprices,whichcanonlybesuppliedbyhighmarginalcosttechnologiessuchasgas-firedplant.Iftoomuchrenewablesweretobeinstalledandsupplyelectricityatzeromarginalcost,theycoulddisplacedpermanentlythehighMCplantoutofthesupplystack,notonlyunderminingtheirprofitabilityundermarginalcostpricingbutpotentiallydrivingthemarkettocollapsesinceitrequiressuchplanttoexistinthefirstplace(Figure4).

24E-CubeStrategyConsultants,“Evolutiondumixélectriquefrançais:lesactifsgazaucentredelatransitionénergétique?,”June2012.http://e-cube.com/fr/wp-content/uploads/2013/12/1206_E3-ENR_Gaz.pdf

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Figure4:Illustrationofthe“meritordereffect”followingtheintroductionofrenewableenergysources

(RES)throughFeed-InTariffs(FIT)orRenewablePortfolioStandards(RPS).Assuminginelasticdemand,themarketpricegoesdownfromPtoP’.

Figure5:IllustrationofMarginalCostPricing.Right:currentmarketstructurewhereatleastsome

meansofelectricityproductionhavehighmarginalcostgreaterthantheiraveragecost.Left:Oncethelastunitofhighmarginalcostpowerplantisdisplacedoutofthesupplycurve,onlylowmarginalcostplants(suchasnuclearandrenewables)remain.Here,marginalcostpricingcannolongerbeapplied;

thisisanaturalmonopolysituation.

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Intermittencyandsecurityofsupply–willthenewcapacitymarketbesufficient?Asthevolumeofelectricitygeneratedbyrenewablesincreases,therearegrowingconcernswithregardstotheabilityofsupplierstomeetdemand.Aswementionedearlier,theintroductionofsubsidizedrenewableslowerstheprofitabilityofflexibleplantssuchasCCGTsbyeffectivelyreducingthemarketspotprice(throughthemeritordereffect).Iftoomanysuchplantsweretopermanentlyshutdown,thesecurityofsupplyandstabilityofthegridwouldbethreaten.TheseconcernswillbepartiallyaddressedbytheintroductionofacapacitymarketinFrancestartingin2016.25Thisnewmarket,introducedbythe2010NOMEAct,26isthefirsteconomicmeasuredesigntocopewithboththegrowingcapacityofintermittentsourcesandarisingpeakdemandinFrance.Theintroductionofthecapacitymarketisnecessarybecausethewholesaleelectricitymarketaloneisunabletoprovidecapacitypaymenttoguaranteesecurityofsupplyatalltime.27Thisnewmarketwillrelyonthreepillars:281)ObligationforallcapacityownersinFrancetocommitontheirforecastedavailabilityduring“peakperiods”(3yearsinadvanceforexistingcapacities).2)ObligationforsupplierstoowncapacitycertificatescorrespondingtotheconsumptionoftheirownclientslocatedinFranceduring“peakperiods”,takingintoaccountanextremereferencetemperatureandthecontributionofinterconnections.3)Tradingof“capacitycertificates”,beginning4yearsaheadofdeliveryyear.Thiscapacitymarket,targetedatpeakdemand,shouldincreaserevenuesofCCGTtypeplants,whichwillbelikelythemosteconomicalfossilfuelplantsin2030undera€100/tCO2carbonprice.ThemarketworksessentiallyasaninsurancepolicyforRTE(theelectricitytransmissionsystemoperatorinFrance,aprivatecompanyandamonopole)thatwillseektheguaranteethatsomecapacitywillbepresentatalltimetomeetdemand.Itdoesnotguarantee,however,thatflexibleanddispatchableplantswillsupplyanyelectricity.Thuswecanimagineasituationweresuchplantsareneverdispatchedandthespotmarketpricecouldagaincollapse.WecanthenaskifCCGTtypeplantsarethenarequirementforthelong-termintegrationofrenewablesintheelectricitymarket–orifthecurrentmarketstructureisjustnotunabletoallowasafeandreliableenergytransitionawayfromfossilfuels.Itseemsthatunlessanewmarketaddressingtheeconomicalandphysicalrequirementofsecurityofsupplyemerges,moreregulationswillbeneededtoaddressthis25EtienneHubert,“CapacitymechanismimplementationinFranceandfuturesteps,”MinistryofEcology,SustainableDevelopmentandEnergy,9thofMarch,2015.http://www.ceem-dauphine.org/assets/dropbox/DGEC-_Etienne_Hubert.pdf26Loiportantnouvelleorganisationdumarchédel'électricité,n°2010-1488,7décembre2010.(NeworganizationoftheelectricitymarketAct).27PaulL.Joskow,“CapacityPaymentsinImperfectElectricityMarkets:NeedandDesign.”UtilitiesPolicy,16(3):159-170,2008.28EtienneHubert,“CapacitymechanismimplementationinFranceandfuturesteps.”

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fundamentalproblem.29Itisimportanttonotethatthecarbonpricingpolicyaloneseemsunabletoaddressthisissue.Meanwhile,asignificantshareofcarbonemittingplantsshouldremainintheelectricitymix,unlessotherflexiblealternativessuchasstoragetechnologiesorcarbonneutralbiomassandbiogasplantscanbedeployed.

Electricityproductionin2030andbeyondTheETGGActobjectiveshavethepotentialtogreatlyreshapetheelectricityproductionlandscapeinFrance.Figure6showstheevolutionofnetproductionbetween2014and2030asitisforecastedbyRTE.30Increaseinenergyefficiency,includinginhouseholdsthathighlyrelyonelectricalheatinginwinter(andresultingreatthermalsensitivityofthedemandinFrance),togetherwiththedevelopmentofpeakshavingstrategiesareexpectedtostabilizeelectricitydemandaround500TWhperyear(Figure7).Thegovernmentobjectiveof40%oftheelectricityconsumptionsuppliedbyrenewablesin2030reliesontheimportantdeploymentofwindandsolarpowerandtheupkeepofexistinghydroelectriccapacity.Thedevelopmentofwindandsolarcapacityandthereductionoftheshareofnuclearpowerrequire,however,thedevelopmentofadditionalthermalcapacity,probablyintheformofCCGTandbiomass/biogasplants.31Thisleadstothecounterintuitiveresultsofincreasingtheshareofcarbonemittingpowerplantsinthetotalnetelectricityproduction.Lookingatthis2030picture,weaskthefollowingquestion:Isthis40%renewables,50%nuclearand10%gaselectricitymixsociallyoptimal?Toanswerthisquestion,werecallthatforthisoutcometobesociallyoptimal,thecostofelectricitymustreflectthenegativeexternalitiesinducedbyitsgeneration.Theintroductionofcarbonpricingatthesocialcostofcarbonwillcertainlyaddresstheexternalitiesinducedbyelectricitygenerationfromfossilfuelstechnologies.Itshouldimpactthestructureoftheelectricitymixsothatcarbonemissionsarereducedtotheirsociallyoptimalamount,whichmightnotbenull.Thuswewouldexpecttheshareofcarbonemittingpowerplantstoeithershrinktothebenefitsofzerocarbonemittingplants,orbereplacedbymoreefficient,lessemittingplants.WeseeherethatcoalandfuelplantsarereplacedbyCCGTsinthe203040/50/10mix.Itishard,however,tounderstandwhytheirsharecouldincreasesosignificantly.Wecanthinkoftworeasons:1)Thisoutcomewillbetechnically

29Joskow,P.andTirole,J.(2007),Reliabilityandcompetitiveelectricitymarkets.TheRANDJournalofEconomics,38:60–84.doi:10.1111/j.1756-2171.2007.tb00044.x30RTE,“Bilanprévisioneldel’équilibreoffre-demanded’électricitéenFrance:Edition2015,”2016.31Coalandoil-firedplantsareexpectedtodisappearby2020(whenthepriceofcarbonwillreach€56/tCO2).

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requiredtodealwiththeintermittencyofrenewableresources.2)Itisthelikelyconsequenceofcappingbothrenewablesandnuclearcapacities.Thesecondpointraisesfurtherquestions,particularlyaboutthefutureofnuclearelectricitygenerationinFrance.Thelegacyofthe1970’sto1990’sdevelopmentofnuclearpowerremainsastrongsourceofprideinFrenchinstitutions,32anditisadifficulttopictodealwithpoliticallywhendiscussingthefutureoftheenergymix.Astheoldestseriesofreactorsinservicearereachingtheendoftheirdesignedlifetime,apublicdebateonthefutureofnuclearenergyinFrancehasyettohappen.WhatiscertainisthattheETGGActhascappedthetotalinstalledcapacityputtinganendtofurtherexpansion.IfnuclearenergywastoremainimportantinFranceinthesecondpartofthe21stcentury,EDFwillhavetomakelargeinvestments:first,toincreasethelifetimeofcurrentplantsfrom40to60years,anoperationthatshouldraisethetruehistoricalcostofnuclearelectricitygeneration,~€60/MWhin2014,33by~€13/MWh;34second,byeventuallystartingtobuildnewplants.ThecurrentcostsofconstructionoftheEuropeanPressurizedReactor(EPR)arenotagoodsignforfutureinvestments,however.Costswereinitiallyestimatedat€3billionsforthe1650MWpowerplantandarenowexpectedtoreach€10.5billions.35TwosimilarreactorsweresoldtotheUKin2013€for31.2billionsandtheBritishgovernmenthadtoguaranteeapriceof€109/MWhfor35years.36Thispriceiscertainlytoohightocompete,forexample,withonshorewindenergyinFranceandmaybe,evenwithCCGTplantsunderahighcarbonprice.EDF’sCEOrealizedthat,andrecentlyannouncedthatthecompanywasseekingtodevelopanewversionoftheEPRabletocompeteonthewholesalemarketwithaproductioncostof€70/MWh.Healsoexpressedthewishtoreplacealltheexistingnuclearcapacityby30or40newEPR

32GabrielleHecht,“TheRadianceofFrance:NuclearPowerandNationalIdentityafterWorldWarII,”MITPress,2ndEdition,2009.33CoursdesComptes,“Lecoûtdeproductiondel’électriciténucléaire:Actualisation2014,”May2014.https://www.ccomptes.fr/Publications/Publications/Le-cout-de-production-de-l-electricite-nucleaire-actualisation-201434Assuming416TWhofelectricityproducedbytheEDFreactors(currentlevel)andaninvestmentof€110billions,from2011to2030,toincreaseallplantslifetimeby20years.35LeMonde,“Nouveaureportdelamiseenservicedel’EPRdeFlamanville,”September3,2015.http://www.lemonde.fr/economie/article/2015/09/03/nouveau-report-et-reevaluation-du-cout-pour-le-reacteur-epr-de-flamanville_4744155_3234.html36LesEchos,“CommentEDFespèrebaisserlecoûtdunouveaunucléaire,”October21,2015.http://www.lesechos.fr/industrie-services/energie-environnement/021420800156-comment-edf-espere-baisser-le-cout-du-nouveau-nucleaire-1167896.php

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plantsin2050.37Weremainskepticalofthispossibilitythatseemsratherunrealisticinlightofthemassiveandriskycapitalinvestmentsthatsuchendeavorwouldrequire.Furthermore,itwouldonlybefairtoothersourcesofelectricitythatexternalitiesfromnuclearpowergenerationfinallybetakenintoaccountintheevaluationofitscosts,includingtheabilitytocovermajordamagesresultingfromlargeaccidentalreleases.Thus,wecanconcludewithhighcertaintythatthe2030energymixenvisionedastheoutcomeoftheETGGActisprobablynotsociallyoptimal,evenifitseemstobeanecessarystepintherightdirection.

Figure6:TheimpactoftheEnergyTransitionforGreenGrowthActontheFrenchElectricitymix.Data

fortherightpiechartareadaptedfromRTE.

37LeMonde,“EDFn’estpasprêtàsortirdunucléaireenFrance,”October23,2015.http://www.lemonde.fr/economie/article/2015/10/23/edf-envisage-de-construire-jusqu-a-40-epr-d-ici-a-2050_4795963_3234.html

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Figure7:HistoricalelectricitydemandinFranceand2014forecastsbyRTE.Theblacklineisthe

referencescenario(statusquo)withtheredandbluelinesrepresentingtheupperandlowerboundsfordemandevolutionwithstrongandweakeconomicgrowth.Thegreenlinerepresentsthepotential

outcomeofthenewETGGAct.38

ConclusionInthispaper,wehavestudiedtheeconomicrationaleofconductingFranceenergytransitionwithanextraordinaryportfolioofeconomicpoliciesimpactingelectricitygeneration,andincludingfeed-intariffs,auctions,carbonpricingandtheEUETScapandtradescheme.Wefindthatsuchapproachismostlyinefficient.Thecarbonpricingpolicyaloneshouldbesufficienttoachievethemultipleobjectivesofemissionabatementanddiversificationofelectricityproduction.Wenotedhoweverthattheuncertaintiesintheabilityofthecurrentwholesaleandthenewlycreatedcapacitymarketstoaddressbotheconomicalandphysicalrequirementsofsecurityofsupply,favoredthecontinuationofconservative(andriskadverse)policiessuchasplacingacaponoftheinstalledrenewablescapacity.Finally,wehavediscussedextensivelythepotentialimpactofthe2015EnergyTransitionforGreenGrowthActonthestructureoftheFrenchelectricitymix.Wefindthatthelikelyoutcomeisnotsociallyoptimal,andthatthenextroundofpolicieswillneedtoaddress,notonlythecurrentmarketfailures,butalsothequestionofwhetherornotnuclearenergyshouldcontinuetoplaysuchanimportantroleintheFrenchelectricitymixinthesecondhalfofthe21stcentury.

38RTE,“Bilanprévisioneldel’équilibreoffre-demanded’électricitéenFrance:Edition2014,”2015.