Following the liberalisation of energy markets in the 2000s, electricity-intensive consumers have faced high and unpredictable prices. In this context, seven major industrial groups (Air Liquide, Solvay, Rhodia, Arkema, Alcan, Arcelor and UPM) established a consortium called Exeltium and launched a Europe-wide call for tender in order to negotiate better conditions for electricity supply. A contract was awarded to EDF in 2007 and the parties then signed a memorandum of understanding with the aim of securing part of the electricity supply to electricity-intensive industrial partners (Exeltium's shareholders) by providing long-term price stability.
The contract between Exeltium and EDF had to be substantially adjusted, further to European Commission concerns that such collective purchasing could foreclose the French power market to other electricity suppliers and that certain envisaged resale restrictions could have been anti-competitive. The European Commission finally cleared the contract, provided that the resale restrictions were cancelled and an opt-out clause for members of the consortium wishing to contract with other suppliers was introduced to mitigate anti-competitive effects.
Following clearance by the European Commission, in 2008 EDF and Exeltium entered into a 24-year supply contract for an electricity supply of 311 terawatt-hours (TWh). The supply was split into two phases: the first concerning 148 TWh and the second concerning 163 TWh. The first phase, which started in 2010, is structured as a take-or-pay contract. Exeltium made an upfront payment of €1.75 billion and pays additional amounts at the time of delivery.
Renegotiation of Exeltium-EDF agreement
The Exeltium consortium – which now unites 27 companies active in the steel, aluminium, chemical, industrial gas and paper sectors – called for a renegotiation of the terms of the agreement entered into with EDF. The consortium claimed that various events and parameters undermined the competitiveness of the Exeltium mechanism.
First, the financing of the Exeltium consortium was carried out in very difficult conditions, in the middle of the global financial crisis. Further, the existence of an opt-out gate at the end of the first 10-year period led the banks to refuse financing for the whole duration of the agreement. Therefore, the financing which was put in place covers only the first nine and a half years of the agreement and refinancing will be required before the end of 2014.
Second, the national and global energy context has significantly changed since 2008:
- At a national level, the Exeltium arrangement has been undercut by cheaper power available under the ARENH mechanism set out by a law dated December 7 2010 to stimulate competition between electricity suppliers in France. Under this mechanism, EDF must make up to one quarter of the nuclear electricity produced (ie, 100TWh per year) available to competitors at a price reflecting the cost of its existing nuclear fleet in France. While the price of the electricity sold under the ARENH mechanism in 2014 amounts to €42 per megawatt-hour (MWh), the price of electricity sold to the Exeltium members amounts to approximately €50 per MWh. Moreover, the law requires that members of the consortium take delivery of the amounts of electricity agreed under the Exeltium arrangement before being granted access to electricity at ARENH prices.
- At a global level, Exeltium members face strong competition from foreign companies in a context where electricity prices have fallen over the last few years. The competitive environment has changed, mainly as a result of decreasing demand and the significant development of other energy sources, such as shale gas in the United States or renewable energy in Europe. In addition, countries such as Norway, Canada and Germany have put proactive policies in place to support electricity-intensive companies. Such policies mean that, for instance, the price that Exeltium pays is 30% more expensive than the price which German electricity-intensive companies pay.
Third, one of the pillars of the Exeltium agreement is an industrial partnership between the consortium and EDF, whereby the consortium bears a part of the operational risks of the nuclear fleet – availability and installed capacity – as well as the risks associated with the development of new nuclear generation capacity. A major shift in France's nuclear policy, which involves reducing the nuclear fleet, will almost certainly have a negative impact on the price that Exeltium members pay for electricity, since this price increases as installed nuclear capacity decreases. Moreover, the substantial increase in building costs for the first European Pressurized Reactor in Flamanville has also negatively affected the price paid under the Exeltium agreement.
After several years of intense negotiation and successive compromises, the parties amended the agreement on July 21 2014. The core idea of the amendment was to introduce more flexibility in the contract, allowing for greater adaptability to future contingencies. The parties agreed to apply a fluctuating price, which will decrease when electricity prices are low and the economic situation has deteriorated, but will increase when the economic situation improves and prices return to normal. EDF agreed to reduce the price that members of the consortium pay by approximately 20% and it has been reported that the new price is now set at around €42 per MWh, in line with the market price. The members of the consortium agreed in turn that this price may be adjusted in the future, to reflect the evolution of the electricity market price. Finally, due to the uncertainties about the future of nuclear projects in France, the parties agreed to reduce the industrial risk borne by Exeltium.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide.