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Opening Up Electricity Markets in France: The Condemned Live Longer

by Roxane Schwandt

The regulation of network industries and natural monopolies has a rich tradition in Europe. But the nationalisation has had long-lasting negative effects, as most governments agree upon. Deregulation, opening up markets to competition and unbundling the production, distribution and transport chain have dominated public discourse for over 30 years by now. Some European countries, such as the United Kingdom, have succeeded in becoming a role model for a successful liberalisation in many sectors that are characterised by natural monopolies.

The gas and electricity markets are a particularly touchy topic in many countries, where public authorities have influenced the development of networks such as transportation, telecommunications – or energy. The objectives of liberalisation are clear – improve performance, decrease prices for consumers and increase quality. But what to do in a country like France, where a system of regulated electricity tariffs has long distorted prices?

Low electricity and a criticised double system in France

French consumers have profited from unnaturally low electricity prices. This is partly due to the origin of electricity in France – over 70 percent originates from nuclear energy, which is generally cheaper than imported gas for example – but also due to the government’s long tradition of subsidising electricity. With a European average of 16.45 Euros per 100 kWh, French consumers paid on average a little more than 12 Euros per 100 kWh in the second semester of 2009. A similar picture counts for companies – the European average is 10.26 per 100 kWh, but French enterprises only paid around 6.56 Euros in 2009.

What is even more striking with the French liberalisation road is that, ever since the European Union has taken a say in opening up electricity markets and creating a single market, two different systems have coincided. On one hand, the European Commission has issued directives from 1996 onwards, paving the way for activity unbundling and ‘complete’ opening of markets in 2007. On the other hand, many obstacles remain. Oligopolies exist in both gas and electricity markets, multi-market presence of companies, insufficient activity separation, lack of transparency, growing market powers of the big European players such as E.ON and EDF (Electricité de France) and regulated tariffs hinder the completion of the internal electricity market. The latter coincides simultaneously with deregulation in France.

EDF and the legacy of protectionism

The French way of liberalising electricity markets while allocating government tariffs to providers has been criticised heavily by the Commission. Indeed, officially the state monopoly of EDF ended in 2004, but the organisation of EDF and the transport company are hardly two entities. Independence is contestable and the French government owns over 80 percent of its capital – this is only the tip of the iceberg. In fact, ever since EDF has tried to implement the EU directives, final prices for consumers have risen, contrary to what increasing competition should introduce. This is linked to the regulated electricity tariffs, which have kept electricity prices in France at an unnatural low. In 2006, the Commission first criticised the non-transposition of the 2003 directive focusing on the judicial separation and increasing harmonisation. As a reaction, the regulated tariffs are going to disappear for companies in 2015. This decision of the French government was important, but shows resistance as well. Given that the tariffs remain in place for end consumers, the government and EDF have opted for the safer option.

Inevitably, electricity prices are going to rise to a European level and the huge disparities between consumer prices are going to disappear in the long term. German consumers can rejoice, French citizens will have no other choice than accept higher prices. The French elite naturally fears to take this step, as it equals political hara-kiri, given President Sarkozy’s current poll ratings and scandals.

The second largest electricity operator worldwide under investigation

This March, the Commission has started an inquiry against EDF because of possible market abuse. EDF’s presence in Europe is impressive – it holds strategic positions in the UK, Germany, Italy and Switzerland, commercial activities in Belgium and Spain and even branches in Austria, Poland, Hungary and Slovakia, which make EDF one of the key players in the European electricity market. The company’s strategy is simple but cunning – it profits from the opening of the European electricity markets and conquers international leverage, while being under the wings of the French government’s protectionism at home. As a reaction to the Commission’s inquiry, EDF has started to revise its contracts, but it remains to be seen if this satisfies the strict competition rules of the European Union.

Above all, the French government needs to let go of the idea of protecting services of general interest. This old tradition is contested and certainly does not improve the EU’s reputation in France. It is time to let go of old worldviews that do not mirror the 21st century anymore. A closer look over the pond to the UK might eventually convince French authorities to plunge deeper into liberalising electricity markets.