Electricity pricing

Electricity: a product that cannot be stored

Unlike gas electricity cannot be stored; it is produced in France by a variety of means of production: nuclear power plants (72% in 2014*), hydroelectric dams (14% in 2014*), coal-fired power plants, wind power (3% in 2014*) and photovoltaic plants (1% in 2014*), etc. In absolute terms, the means of production in France cover consumption needs.

To ensure a supply at all times, the means of production are sized to inject the power called for by all end customers even in peak periods (for example in winter at the end of the day). Some means of production are therefore designed and operated to produce only in the event of peak demand.

Given that the kWh cost of production is very different from one means of production to another, depending on the demand at the time it is consumed, the kWh will not be at the same price. The standard operating principle for supplying the network is based on the notion of "merit order", which determines the means of production to be called on first, in order of increasing production costs.

Electricity is sold on the market via organized exchanges or direct trades between the players (producers and suppliers). The price of electricity is not fixed globally, it depends on the geographic area. There are therefore local prices depending on interconnected markets, such as EPEX SPOT for spot trading and EEX Power Derivatives for futures in France. In order to allow alternative suppliers, including Eni, to benefit from competitive tariffs the French state also set up a system of regulated access to incumbent nuclear electricity - ARENH (Accès Régulé à l’Électricité Nucléaire Historique) – which gives a right of access to nuclear electricity via a separate contract with EDF.

EPEX SPOT

The European Power Exchange (EPEX) publishes the electricity prices for the day and the next day, which is known as the spot market. EPEX SPOT manages spot markets for electricity in France, Germany, Austria, Luxembourg and Switzerland.

EPEX SPOT manages the Day-Ahead electricity markets for France - that is to say for the electricity supply the next day. A bidding system is organized, changing the supply and demand curves once a day.

The price of electricity is a much more volatile than that of most other products. This is largely due to the fact that electricity cannot be stored (or only with difficultly). Thus production may exceed demand causing prices to fall, but the reverse is also possible creating a considerable increase in prices.

Despite the fact that it is an interconnected market, prices differ from country to country. Spot prices are different because there is insufficient interconnection capacity between countries.

EEX Power Derivatives

EEX Power Derivatives (European Energy Exchange) is a wholesale electricity marketplace based in Leipzig.

In order to minimize the risks associated with spot markets, electricity market players may also sign contracts for the sale or purchase of electricity to be supplied in the weeks, months, quarters or years to come at a price negotiated at the time the contract is signed. Being longer term, and based on an average of the spot prices anticipated for the future period concerned, futures are less volatile.

The alternative wholesale market: ARENH

The December 2010 new electricity market organization legislation in France (NOME- Nouvelle Organisation du Marché de l’Électricité en France) complements the legislation that organizes the opening up of the energy market to competition. The main contribution of this legislation is that it institutes regulated access to incumbent nuclear electricity (ARENH- Accès Régulé à l’Électricité Nucléaire Historique).

ARENH enables alternative suppliers, including Eni, to benefit from regulated and competitive prices for the nuclear electricity generated by EDF. It shares the "nuclear rent" between EDF and the alternative electricity suppliers up to the limit of 100 TWh of electricity per year. France’s energy regulation commission (CRE - Commission de Régulation de l’Énergie) calculates the fees for each supplier on the basis of their customers' consumption forecasts. The distribution of volumes between the different electricity suppliers is therefore based on the size of the customer portfolio.

To prevent a supplier from buying electricity at the ARENH price and then reselling it on the open market, the CRE controls the actual consumption of electricity.

Renewable electricity

The cogeneration and renewable energy means of production (for example, photovoltaic or wind power) may, under certain conditions, lead to the signature of purchase obligation contracts with the appropriate supplier (EDF and ELDs). The prices under these contracts are more interesting than those on the exchange and are set by the authorities. These new means of production form part of the mechanism to support the development of renewable energies. This production is then resold via the electricity supply activities of EDF and the ELDs.

The vendor's selling price is in theory less than the purchase price set in the purchase obligation contract. Compensation is calculated by the government and repaid to the obligated suppliers. This compensation is collected via a tax included in the electricity bills of all final consumers in France: the electricity public service contribution (CSPE – Contribution au Service Public de l’Électricité).

Renewable energy producers may also sell the source guarantees separately from the electricity, which will no longer be considered green electricity. They issue these guarantees to Powernext, in its capacity as manager of the national register of guarantees of origin in France.

The retail market in France

There are two types of offers in the retail electricity market:

-          Market offers, the prices of which are fixed freely by the suppliers.

-          The regulated sales tariffs set by the Ministers for Economy and Energy, on the advice of the independent energy regulation commission (CRE).

All electricity suppliers are able to propose market offers. Conversely, regulated electricity sales tariffs are only offered by the incumbent suppliers - EDF and the local distribution companies (ELDs). Other suppliers are called "alternative suppliers". They arrived on the French electricity market after it was opened up to competition. Eni is an alternative supplier proposing market offers.

There are different market offers such as fixed price offers in which the price per kWh does not change over the duration of the contract. With indexed price offers the kWh price follows the changes in regulated sales prices.

A market offer may be "green" if the supplier can prove that it has produced or purchased an amount of electricity from renewable sources that is equivalent to the consumption of customers who have subscribed to that offer. To prove the origin of electricity produced from renewable sources, only guarantees of origin are able to certify it. The company Powernext is responsible for issuing, and the transfer and use of, the guarantees of origin on the national register of guarantees of origin.

* Information published by the CRE in "Operation of wholesale electricity markets" in November 2014.