Introduction
Nuclear power cap
Renewable energy
Comment


Introduction

The ongoing debate over environmental issues and their impact on the French energy model raises many issues. Successive governments have taken different approaches to the problem and energy transition has been presented as a key initiative of President Hollande's five-year mandate. Following an eight-month national debate and two conferences which brought together ministers, elected officials and non-governmental organisations, on July 30 2014 a draft energy transition bill was put before Parliament.

The draft bill sets out numerous measures for improving energy efficiency (eg, a 30% tax break and other incentives for the energy-efficient renovation of buildings), with a view to achieving a 50% reduction in energy consumption by 2050. Moreover, it sets ambitious targets for boosting the use of electric cars in line with the objective of a 30% reduction in fossil fuel consumption by 2030. However, the main developments demonstrating the major shift in the French energy model relate to nuclear and renewable energy.

Nuclear power cap

The existing French energy model involves a significant proportion of nuclear energy, due to an ambitious nuclear programme first established by President de Gaulle and substantially reinforced after the first oil crisis in order to ensure energy security and reduce reliance on fossil fuels.

France currently has 58 commercial nuclear reactors spread over 19 sites, with a total installed capacity of 63.1 gigawatts (GW). In 2013 these reactors produced 73.7% of all French electricity. France is the largest exporter of nuclear electricity in the European Union and second in the world (behind the United States) in terms of total nuclear power generation. The nuclear fleet is operated by EDF, a listed company in which the French state has a 84.5% stake.

In the wake of the Fukushima accident, Germany decided to shut down all its nuclear plants by 2022. Such a radical solution was not viable in France, given the importance of nuclear energy. Nevertheless, the intention is to reduce French nuclear dependency, and one of Hollande's campaign commitments was to rebalance the energy mix and reduce the share of nuclear energy from 75% to 50% by 2025.

Initially, this commitment was to be reflected in the closure at the end of 2016 of the 1,600 megawatt (MW) Fessenheim nuclear power plant, the oldest operational plant in France. However, this raised several legal and practical issues:

  • The authorisations for operating nuclear plants are not limited in time. However, it is a regulatory requirement that the operators of nuclear plants carry out safety re-evaluations and 10-year inspections of their facilities. On the basis of the review issued by the operators, the Nuclear Safety Authority (ASN) issues an opinion as to whether the operator can continue operating the plant. In 2011 and 2013 the ASN issued positive opinions regarding the suitability of both nuclear reactors of the Fessenheim plant to continue operating for an additional 10 years, subject to carrying out reinforcement works and implementing technical safety provisions. Therefore, from an operational perspective, the two Fessenheim nuclear reactors may be operated until 2020 and 2022.
  • The closure of a nuclear plant can be ordered for safety reasons by the ASN or for safety and/or industrial reasons by the operator itself. Hence, a decision to close a nuclear plant for other than industrial or safety considerations can be implemented only through legislation and entitles the operator to compensation. In the case of the Fessenheim plant, such compensation would have to take into account the investments made by EDF since the last 10-year inspections (approximately €400 million) and the expected return on the operation. More specifically, the compensation would also take into account the fact that EDF has entered into generation allocation contracts with German company EnBW and Swiss electricity group CNP in respect of the Fessenheim plant. These companies participated in the financing of the construction costs and pay a share of the plant's annual operating costs, local taxes and taxes specific to nuclear energy. In exchange for sharing the industrial risks with EDF, EnBW and CNP are entitled to 17.5% and 15%, respectively, of the energy generated by the Fessenheim plant.
  • The conditions of the closure and dismantling of a nuclear plant are to be authorised by the ASN. In light of the various deadlines set out by the regulations, obtaining such approval can take up to five years.

The solution proposed by the government in the draft bill in order to rebalance the energy mix is both surprising and questionable.

On one hand, the draft bill clearly provides that one objective of the energy policy is to reduce the share of nuclear energy from 75% to 50% by 2025. On the other, it caps nuclear generation capacity in France at the current level of nuclear generation (ie, 63.2GW). The draft bill provides that new generation authorisations cannot be granted if they would lead to this cap being exceeded.

In other words, the draft bill leaves it to the operator to manage the nuclear generation capacity in operation at any time. From a practical point of view, in the current situation, if EDF decides to create new nuclear capacity it cannot be granted a generation authorisation in this respect unless it closes one or more plants with a nuclear generation capacity equal to that which will be created. In this context, the commission of the 1,650MW European pressurised water reactor in Flamanville by EDF and which is scheduled for 2016, can operate only if a plant with the equivalent nuclear generation capacity is closed.

The proposed mechanism raises several issues that require clarification during the parliamentary debate.

It is unclear how the 50% nuclear share objective shall be achieved, given that EDF intends to extend the operating life of its nuclear power plants significantly beyond 40 years and is likely to be granted the required authorisations in this respect.

Moreover, the mechanism set out in the draft bill aims to make EDF responsible for the management of the overall nuclear generation capacity. This is intended to ensure that the state will not have to compensate EDF for the early closure of existing plants. However, from a legal point of view, it will be difficult for the state to argue that the early closure decision is actually EDF's. If EDF receives no compensation, it could argue that the cap on nuclear generation capacity amounts to expropriation. Indeed, EDF was unaware, when it decided to undertake construction of the European pressurised water reactor or to invest in extending the operating life of the Fessenheim power plant, that it would be required to make trade-offs between its various investments and would not be in a position to recover its investments. However, bringing a claim against the state on the grounds of expropriation would be difficult for EDF, as the state is its largest shareholder. Should the claim succeed, this would result in the state in its capacity as regulator/legislator indemnifying the state in its capacity as shareholder. Therefore, the risk remains that the state, in its capacity as shareholder, eventually renounces such claim, sacrificing the interests of EDF's 15% floating shareholders.

The cap on nuclear generation capacity also raises issues regarding the EU directives implemented into French law, which provide for the liberalisation of the energy sector, notably in respect of the construction of new generation capacity. The cap proposed by the draft bill may be construed as a partitioning of the French nuclear market, as the entire nuclear fleet is currently operated by EDF and new available generation capacity can be created only if EDF closes generation capacity. In practice, this amounts to granting EDF a de facto monopoly over nuclear electricity generation in France. Such situation is questionable from an EU law perspective and there is little doubt that the European Commission will criticise the scheme.

Renewable energy

The draft bill establishes a target of boosting renewable energy to 32% of all energy consumption by 2030, instead of the 14% target set in 2012.

France is far from reaching the target of 23% renewable energy in overall energy consumption by 2020 in accordance with the objectives set at EU level, despite the windfall effect of the high-incentive support schemes for the development of renewable energy.

Since 2000, the main support scheme used for the promotion of renewable energy has been the obligation imposed on EDF and local distribution operators to purchase electricity produced from renewable sources by independent power generators at a preferential tariff, which is higher than the market price. This obligation applies for 15 to 20 years, depending on the type of energy.

The feed-in tariffs – the costs of which are ultimately borne by end users – have been frequently criticised by the energy regulator (the Commission de regulation de l'énergie) and the National Accounts Court. These institutions believe that the feed-in tariffs generated exorbitant profits for power generators. Moreover, it has been established that installations benefiting from the power purchase obligation are not exposed to the supply-demand balance. Therefore, such installations generate electricity without taking into account the actual need for electricity, resulting in a negative price effect.

In 2009 and 2010 the government made two reductions in the feed-in tariffs for solar facilities and imposed a four-month moratorium on new solar projects in an effort to burst the speculative bubble that had developed in the solar market due to the combination of excessively high tariff rates and a reduction in the cost of solar plant equipment.

Consequently, since 2010 preference has been given to the mechanism of the tender process for the construction of new renewable generation capacity. Under this mechanism, the state can choose the type of energy that it wants to promote and can determine the main conditions of projects to be awarded through tenders (eg, the technical, economic and financial conditions and the localisation of projects) on a project-by-project basis. The winner of a call for tender is awarded the right to enter into long-term power purchase agreements with EDF or local distribution operators at a guaranteed price, in accordance with the bid it submitted.

The disadvantage of these favourable support schemes is that renewable energy projects face legal uncertainty given the considerable public opposition to such projects. As an example, this opposition led to the filing of a claim which, at the end of a five-year proceeding, resulted in the annulment of the feed-in tariffs for wind farms on the grounds that they constituted unlawful state aid. Although the government has managed to secure the feed-in tariffs for such projects by obtaining European Commission approval for the support scheme, the uncertainty and lengthy proceedings have discouraged many investors from developing new projects.

The draft bill partially takes into account this criticism and the various issues faced by the renewable energy market. The main renewable energy provisions are as follows.

Compensation mechanism for renewable energy producers
In addition to the power purchase obligation, the draft bill provides for a compensation mechanism whereby producers selling electricity from renewable sources on the market at market prices would receive compensation (likely to be a cash payment). The government will choose the types of renewable energy installations that will benefit from the purchase obligation or compensation mechanism. Moreover, winners of calls for tenders will be able to choose between a power purchase agreement at a guaranteed price and the compensation mechanism. The level of compensation granted to renewable energy producers shall be revised periodically in order to take into account the reduction of costs borne by new installations that are eligible for the compensation mechanism.

The introduction of a new support scheme indicates the political desire to restrict the application of the power purchase obligation in favour of a more flexible, less costly mechanism. However, at this stage it is difficult to assess the impact of these provisions, as it is not yet known how it will be decided which renewable energy installations will continue to benefit from the power purchase obligation and which will have access to the compensation mechanism. Moreover, the level of compensation under the compensation mechanism will be set out by the government once the law is in force.

Participation of local stakeholders in renewable energy projects
Local acceptance is one of the main challenges that developers of renewable energy projects must face. In order to enhance local acceptance – and hence the legal certainty of projects – the draft bill includes provisions on the involvement of local stakeholders in renewable energy projects.

Under the draft bill, local authorities will be authorised to acquire a share in the capital of companies that are developing renewable energy projects in or near their territory. The participation of local authorities in private companies is regulated and a legislative provision is thus necessary in order to allow for their involvement in such projects.

The draft bill also provides that when setting up a special purpose vehicle for the development of a renewable energy project, the project sponsors shall allow the residents of the area or the local authority to acquire a stake in the share capital of the special purpose vehicle. Although an earlier version of the draft bill provided that the minimum stake to be proposed to such local stakeholders would be determined by the state, the latest version does not address this issue.

Comment

More surprises – whether good or bad – are expected from the implementing regulations and the related legislation.

For further information on this topic please contact Mehdi Haroun or Ruxandra Lazar at King & Spalding LLP by telephone (+33 1 7300 3900), fax (+33 1 7300 3959) or email (mharoun@kslaw.com or rlazar@kslaw.com). The King & Spalding LLP website can be accessed at www.kslaw.com.