A new French government may revisit plan to phase out coal-fired power

31 October 2016 06:10 Source:ICIS

A future French government will probably revisit measures to reduce coal-fired power generation in the country, according to a think tank.

The measures could see the end of French coal in the power mix before 2023. However, the impact of a unilateral carbon tax on emissions remains unclear, analysts said.

“The next government will probably also be concerned to reduce coal and increase nuclear, and their manoeuvrability margins will be higher, so the next government will probably fulfil today’s government promise to close coal plants before 2023,” a spokesman for think tank The Shift Project told ICIS.

The introduction of a carbon tax on French power generation sent shock waves through European power markets when it was first announced on 25 April. The French Cal ’17 Baseload contract was priced €1.90/MWh above the previous ICIS assessment the following day, making it the largest daily increase on the product for more than three years. Even bigger gains were seen on the Cal ’18 and ’19 Baseload contracts, which jumped €2.75/MWh and €2.375/MWh.

Fast forward to 21 October when, after much back and forth the plan was finally abandoned, and the contrast in market impact could scarcely be bigger. The front year gained during the session and the Cal ’18 and ’19 contracts shed no more than €0.15/MWh compared to the previous assessment.

“There was a minor reaction on the day, but nobody wants to be short on the French market now,” one trader said, in reference to recent sharp upwards moves and price volatility.

“The Cal ’18 and ’19 contracts are not typical products for speculators and can be difficult to liquidate,” he added.

‘Impossible to implement’

The contracts have since gained by almost €2.00/MWh, amid concerns that weak nuclear availability could become a longer-term issue.

“France is facing the tightest supply situation in modern history, which made it pretty impossible to implement a carbon price at this point,” Olav Botnen of market analysis company Markedskraft said.

The Cal ’17 Baseload contract has broken through the three-year-high gain on 26 April on no less than three occasions within the last month alone.

One of the key arguments for abandoning the measure was linked to carbon leakage.

The impact would be limited, reducing French emissions by 12 million tonnes while increasing emissions in neighbouring countries by 8 million tonnes, the Shift Project spokesman said, pointing to increased coal- and gas-fired generation in Germany, Italy and Spain.

“The British model has helped to reduce coal-fired generation in the UK, but the country is likely to increase imports from countries where coal-fired generation is used as more interconnectors are built,” Botnen said.

This would include a link to Belgium and increased interconnection with France, which would ultimately mean the UK has greater capacity to access mainland Europe’s coal-fired plants.

“You might think there would be less opportunities for leakage if Germany had joined, but you would need to broaden it further [for example, to Eastern Europe] to make the measure effective,” Sean Gammons from consultancy group NERA said.

“I think the way forward is reform of the ETS. It makes more sense to go for abatement where it is cheapest, rather than try national measures,” Gammons concluded.

The French measure as originally presented was to apply equally to gas- and coal-fired generation, but was later watered down to removing an existing coal tax exemption for power producers. joachim.moxon@icis.com

By Joachim Moxon