French energy regulator CRE has warned suppliers they may not receive all subscribed electricity volumes they are hoping to secure under the ARENH mechanism.
ARENH allows alternative suppliers to buy power from EDF’s older nuclear plants for year-ahead delivery at a fixed price, currently €42.00/MWh.
Subscribed volumes reached a record of 82.2TWh for delivery in 2017, but many stakeholders in France expect subscriptions to reach the maximum 100TWh this year due to the front-year wholesale price having hovered around €42.00/MWh since September.
With capacity auction costs, ARENH is actually comparable with a wholesale price of around €40.80/MWh.
On Thursday ICIS assessed the French front-year at €42.25/MWh. Buying through ARENH would allow suppliers to significantly de-risk the year ahead in terms of potential upward price fluctuations.
The 100TWh ARENH volume accounts for around 25% of EDF’s nuclear generation.
If the ceiling at 100TWh was reached this year, French suppliers would not obtain all the volumes corresponding to their client portfolio and would have to buy the additional power in the wholesale market, or possibly at a regulated price according to the outcome of an ongoing consultation.
CRE is considering evaluating the cost to alternative suppliers of acquiring additional energy supply in the market in case the ARENH ceiling is breached.
Parallel mechanisms co-exist to regulate the French market. ARENH was introduced in 2011 to foster competition in the wholesale and retail markets, while a capacity market was launched on 1 January 2017 to secure supply during very high demand periods.
The capacity market has effectively increased the degree of complexity for French suppliers as they will have to decide on Thursday 9 November and again on 15 December how much capacity guarantee to procure in the auctions, to be operated by European exchange EPEX SPOT.
French grid operator RTE’s outlook for winter 2017-18, to be presented in Paris on Tuesday 7 November, could influence how many capacity certificates companies decide to buy in the auction on Thursday.
Lack of price clarity
At a recent industry event in Paris, several suppliers in France complained about a lack of price visibility due to the co-existence of these mechanisms.
The results of the first capacity auction could be pivotal for ARENH subscriptions which need to be notified to the regulator by 20 November.
The higher the clearing price in the first capacity auction, the more likely it is that suppliers will want to maximise ARENH volumes. A clearing price at €1.189/MWh from the previous auction meant that ARENH becomes competitive with a €40.80/MWh front-year baseload contract in the wholesale market, and not a product priced at €42.00/MWh as was the case before the capacity market.
Price collapse risk?
Suppliers must also take into account the risk of wholesale market price, as happened in 2016.
Within days after the ARENH volumes were announced on 1 December 2016, the Cal ’17 Baseload contract collapsed 22% as suppliers rushed to arbitrage between the wholesale price and the ARENH tariff. Many who sold at sub-€42.00/MWh would have accepted a loss, but would have done so to take advantage of even deeper price drops, should they ocur.
One participant described trading either side of ARENH as “pure speculation”.
Fit for purpose?
CRE launched a consultation on Thursday asking French suppliers to give their opinion by 15 November on whether the current framework for ARENH was in line with supplier’s practices in the market.
For additional supply of energy above that available through ARENH, CRE proposes retaining the arithmetic average of the calendar product between the date of volume notification of ARENH and the start date of the delivery period on 1 January 2018.
Regarding any need for additional supply of capacity above that purchased at the auctions, CRE proposes using the clearing prices at auctions organised between the ARENH volume notification date and the start date of the delivery period, based on an arithmetic average.
For 2018, the cost of additional supply of capacity would be based on the clearing price at the capacity auction on 15 December, it said.
Read an ICIS briefing on the French ARENH tariff here . email@example.com