Q&A: France's UFE favours gradual energy transition

OREANDA-NEWS. August 01, 2016. The president of French electricity producers union UFE, Christine Goubet-Milhaud, spoke to Argus in Paris at the of June about key electricity topics, such as energy transition, capacity markets and carbon price measures. Edited highlight follow:

You were recently elected president of UFE. What will be the main objectives of your mandate?

I have taken the presidency at a time when an important transformation is taking place in France and in Europe. The coming years will be crucial to shape our sector — we are currently implementing a new energy transition law adopted in August 2015, and a new European legislative package will be discussed this year to review directives such as market design, renewable energy and energy efficiency. At the same time, consumers will have a key role to play in the future energy framework with the digital revolution. The UFE unites all power sector players, allowing us to have a global vision of this transformation that consists of two important topics. Firstly, the climate, which implies the reduction of CO2 emissions at all levels — national, European and global; and secondly, the integration of a growing decentralised part of the French electricity system. We will need to take into account decentralised renewable production, local authorities that wish to have the opportunity to influence demand and a more active role for consumers to manage their consumption. Electricity networks will need to become more flexible to support this change.

What I wish to do with our members is to build a common mid and long-term vision of this transformation to see how we can make proposals at French and European levels.

I have proposed a roadmap with five main guidelines. The first is to continue working towards a decarbonised economy by introducing a carbon price that is high enough to encourage low-carbon investments and energy efficiency measures. The second point is to establish market rules that can guarantee security of power supply. In this context, we think that a capacity market should be implemented to ensure a continuous availability of power plants that are rarely operational throughout the year, but needed for periods of peak demand. The third point is to develop network infrastructure to facilitate energy transition; the fourth is innovation, research and development as support of these evolutions; and finally, we must not forget that the energy transition is also socio-economic, so we need to consider the social aspects of this transformation with a real change management.

One of the main objectives of the energy transition law is to diversify France's power production mix. How do you think renewable and nuclear energy are compatible?

The question of the power mix is not to oppose different energy sources, but to make the best possible choice. There is a number of criteria to take into account, such as production costs, the type of generation — intermittent or not — security of supply, energy independence and how to keep energy prices for households and industries competitive. In this context, sectors such as nuclear and gas remain absolutely necessary to guarantee the balance of supply and demand, but renewable energy should have a more visible place in the mix. We are moving towards an even more decarbonised generation mix, although carbon emission levels in France are already very low. The French electricity sector emits 23mn t/yr CO2, compared with the German, which emits around 300mn t/yr CO2.

Do you believe it is feasible to reduce the share of nuclear in the power production mix to 50pc by 2025?

The share of nuclear energy will be different in 2025 because the share of renewable energy will rise, but the extent of this will depend on different criteria in a pragmatic approach combining security of supply, the evolution of electricity consumption and renewable capacity development. It will depend, also, on whether we are able to adapt the network and keep supply and demand in balance at all times, which is the point where renewable energy becomes compatible with nuclear. We should always guarantee security of supply and we should not take any risks about that. The movement has been launched, but to answer whether it is feasible or not, I think we need to follow the rhythm that will allow us to ensure the balance at all times and to finance network adaptation costs.

So, it is through development of renewable capacity that the share of nuclear will drop almost spontaneously?

The plan is not fully written yet. The energy policy sets the targets, but then it is important to manage economic, technical and also social transformations because behind all this, there are jobs. Even if we decide to stop all coal plants, the change will not happen overnight. There are jobs associated with it, so we need to give some visibility in order to redeploy people to other sectors where new jobs will be created. I believe the social aspect of this transformation is crucial and sometimes a bit overlooked. Changes cannot happen rapidly because jobs are also important — it is what makes a country living.

What is the best way to integrate renewable power installations into the market?

Instead of having feed-in tariffs — which remain in place for onshore wind until at least 2018 to keep some visibility for the sector — France has recently put in place a new support mechanism for renewable energy based on a market premium. This premium is not fixed, it is calculated as the difference between a target price and the average market price. Renewable energy now has to confront the market and the more they are able to generate power when we need them, the more compensation they get. Eventually, the premium could drop in line with productivity gains and cost reductions for each sector until it disappears completely, meaning that the sector will gradually become mature. I think this transition period is very important and there is no reason why they could not enter the market like other, conventional power production sources. But as I said before, it will be crucial to develop the network and increase its flexibility in order to keep supply and demand in balance. This will be particularly important because of the new forms of decentralised self-production and consumption.

The implementation of a capacity market in France could be delayed because of a European Commission inquiry into whether the system complies with European competition rules. Do you think France needs a capacity mechanism?

We think a capacity mechanism is necessary, and not only in France — other countries have already implemented systems such as capacity reserves. But the mechanism should comply with the European energy market criteria, which is why the commission wanted to carry out an inquiry before the launch of the French mechanism on 1 January 2017. The energy-only market has a number of flaws that need to be improved, such as giving insufficient price signals for mid and long-term investments.

Do you expect the launch of the capacity market to be delayed?

The commission's final decision is not known yet because the inquiry is continuing, but we think the French capacity market solution is in line with the commission's recommendations because it is open to all technologies, including demand-side management. The rules of the French capacity mechanism have been designed in order to facilitate the participation of demand response while guaranteeing technology neutrality. There is one point that we continue to discuss with the commission, which is the participation of cross-border capacity in the French mechanism. What we proposed is to launch the capacity mechanism on 1 January 2017, but improve the system afterwards, which would allow us to implement it step by step and develop the cross-border part of the mechanism.

Given low wholesale electricity prices at present, do you think some power plants might close if the launch of the capacity market is delayed?

We think the capacity mechanism is very important in order to keep a few peak demand production units by giving them a compensation for their contribution to security of supply. There are some power plants in France that are absolutely essential, but economically not profitable. Without a capacity mechanism, these units could close, which would put at risk France's supply and demand balance. The value of capacity is today not taken into account, so a rapid implementation of a capacity mechanism is quite urgent. Although at the moment we have some excess capacity, this does not mean we are safe from blackouts. As an example in France during winter, a drop of 1°C results in an up to a 2.4GW increase in power demand, and peak demand can vary up to 20GW from one year to another because of the thermal sensitivity of the French electrical system. I think it is, therefore, crucial to have some reserve capacity to cope with any tensions on the power grid, especially in peak hours — it is the question of security of supply.

France is planning to introduce a carbon floor price for electricity production in January 2017. What are your views on such a measure?

UFE had always supported the idea to implement a European carbon price that is high enough to incentivise investments into low-carbon technology, such as renewable energy, including hydropower and nuclear plants. With a CO2 price of €5/t CO2 equivalent seen today, there are no incentives for energy transition because the carbon price is so undervalued. A higher carbon price is essential to meet our climate objectives. It is important not only to transform our electricity system, but essentially to make our world liveable.

This is why we support the EU emissions trading scheme (ETS) carbon allowance mechanism, but the problem is that the system is not functioning properly, which is why we need to review it. The European Commission has proposed a market stability reserve to regulate the volumes, while the French government wants to introduce a carbon price corridor to improve the price predictability. The EU ETS review will begin at the end of this year, but European countries have different views on it because their energy mixes vary. We cannot judge that because this is a matter of energy independence, but I think it may be difficult to come to an agreement. Even if the countries eventually agree on revisions, full effect of these will not occur until 2030. The question, therefore, is whether we wait until 2030 and lose some crucial years to prepare the future and further decarbonise our economy, or do we do something else in the meantime? France's idea is to set up a carbon floor price until a European solution is in place, without penalising the French competitiveness. We are trying to define the impacts on power production, the environment and the economy, as well as on potential job losses owing to plant closures. And we are also looking into security of supply to see if alternative measures exist. We have not reached the final stage of this debate, but we are trying to ensure all market players can grasp the impacts to make an informed choice.

But I would like to underline that the fight against climate change is not only a matter of CO2 price and energy mix — we must promote a cultural change in domestic and industrial consumption. The development of ambitious and climate-oriented energy efficiency policies is crucial in order to empower consumers and foster "greener" energy demand by shifting from carbon-intensive to low-carbon energy use. This is especially true for sectors such as transport and buildings, whose potential is still underestimated.