French front-year power price casts doubts on ARENH option

The French power market is facing increased price risk related to the regulated ARENH tariff following a 36% price increase on the front year contract since early September.

“If the market price remains around €42.00/MWh, this will create uncertainty about drawing from ARENH and that would increase OTC volume,” one trader said on Thursday.

This is because traders would be tempted to buy wholesale if the price fell below €42.00/MWh, but sell if it moved back above, and buy instead under the regulated ARENH tariff model when contracts are offered in mid-November.

The tariff became competitive with year-ahead wholesale electricity market prices for the first time since December 2014 on Tuesday, when the annual baseload contract for 2017 delivery pushed past €42.00/MWh.

As a result, all traders contacted by ICIS agreed there will be significant interest among suppliers to cover customer demand in 2017, but there is little clarity in terms of the impact of this on wholesale market liquidity or prices.

The mechanism contributed to a stagnation in liquidity on the over-the-counter wholesale market until the end of 2014, because delivery of ARENH volume is settled off-market via the energy regulator.

“The market will definitely be looking at ARENH as an option, but it’s likely that many participants have already covered much of their demand for next year and the bullish moves seem increasingly contained to the front quarter,” a second trader said. “We are already seeing that things are calming down further out on the curve,” he added.

Market participants will have to decide on 15 November whether to buy ARENH and at what volume. Annual supply contracts are offered twice annually, typically in November and July.

What is ARENH?

The ARENH tariff was first implemented in 2011. Under the mechanism, power incumbent EDF is obliged to set aside 100TWh of electricity, which represents about a quarter of its annual nuclear production. Volume from this pool is sold at a regulated price depending on demand.

The tariff was revised up from €40.00/MWh to €42.00/MWh on 1 January 2012, at a time when lower wholesale market prices were not a consideration – the Cal ’13 Baseload contract was trading at over €60.00/MWh at the start of 2012 due to the relatively higher costs margins of coal- and gas-fired generation.

As a result the ARENH tariff became the preferred instrument to try to level the playing field between power incumbent EDF on the one hand, which controls all of the 58 nuclear reactors in France, and alternative suppliers on the other, which control comparatively little production capacity in the country.

The cap of 100TWh has never been reached, but the likelihood of this happening for next year was discussed during last week’s Gazelec conference in Paris.

Discussions between the French government and the European Commission regarding a new methodology for calculating the ARENH price are now on hold and not an immediate priority, Julien Tognola, deputy director of energy markets at the ministry, confirmed at the Paris conference. joachim.moxon@icis.com