French Power Narrowing Gap With Germany After Breaking EDF Floor

French power is poised to extend declines, narrowing a premium over Germany, after falling below Electricite de France SA’s regulated wholesale rate.

French prices broke through the “invisible floor” of 42 euros ($49) per megawatt-hour on Dec. 5 and may approach those in Europe’s biggest economy in the next couple of months, Exane BNP Paribas said. That would imply a drop of another 16 percent, according to broker data compiled by Bloomberg. The slide is encouraging companies including Direct Energie, a Paris-based power distributor, to buy in the market instead.

EDF, the world’s biggest nuclear operator, is required to sell about a quarter of its annual French atomic output to rivals to increase competition. The government is reviewing how it calculates the cost of producing nuclear, known as Arenh. While EDF argues that it needs to increase to better reflect the price of generation, other power distributors and industrial consumers want a reduction.

“Arenh could become irrelevant,” Philippe de Ladoucette, president of the nation’s energy regulator, said yesterday in an interview in Paris, referring to the possibility the rate will remain above market prices.

France’s 2016 power premium over Germany was 5.95 euros today, the lowest level for that contract since December 2013, according to broker data. The average for the past year is 8.02 euros.

The slump accelerated in December after prices fell below 41.50 euros for the first time since Arenh was introduced in 2011. French year-ahead power traded at about 37.80 euros today, compared with 31.80 euros in Germany.

Market Incentive

“Clearly there is incentive in the short term for suppliers to buy on the market rather than Arenh,” Fabien Chone, Direct Energie’s deputy chief executive officer, said yesterday in an interview in Paris. That may change longer term, he said, declining to comment on whether it buys Arenh power to re-sell to French customers.

EDF sold 67 percent less Arenh-priced power to its competitors for the first half of 2015 than for the same period a year earlier, according to the energy regulator. Full-year figures haven’t been published.

A drop in the amount bought at the Arenh rate, “is understandable considering market prices,” de Ladoucette said.

EDF will have to resell the unsold Arenh quantities on the open market after a “collapse” in interest from buyers, Benjamin Leyre, a utilities analyst at Exane BNP Paribas, said yesterday in a note to clients.

The energy regulator proposed in October that the Arenh rate should rise to 44 euros this year and by another 4.5 percent in 2016. The government is yet to decide on whether it adopts the revision.

The rate should gradually increase to 55 euros to reflect costs, EDF’s Chief Executive Officer Jean-Bernard Levy told Senators yesterday at a hearing in Paris.

“While we didn’t sell all the available Arenh, we still want it to reflect costs because there is no reason to accept a system under which we would subsidize our competitors,” he said.

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