By Gavin Maguire
LITTLETON, Colorado (Reuters) – The collapse of France’s government on Wednesday could have far-reaching consequences for Europe’s energy markets and send regional electricity costs soaring.
France is by far the largest electricity exporter in Europe, accounting for roughly 60% of net electricity exports so far in 2024, according to energy data service energy-charts.info.
Record French electricity exports this year have provided neighbours with critical supplies of cheap and clean power while the region remains hobbled by high energy costs, weak economic growth and political disarray.
But France’s own political upheaval now calls into question whether the country can sustain its high levels of electricity output and exports.
BUDGET BUSTING
French utility EDF (EPA:EDF) is closely entangled in the country’s political system, as the company was taken over by the government in 2022 after racking debts of roughly $10 billion.
EDF runs the country’s nuclear power fleet, which supplies around 70% of France’s electricity, and so is viewed as of critical national importance.
However, the company’s massive debt pile has only added to the government’s own growing debt obligations, a major factor behind the government’s collapse.
As a state-owned entity, EDF can access capital at preferential rates, and just last month the government was planning to make interest-free loans to EDF to cover the construction cost of new reactors.
However, the energy sector is also looked on as a potential source of government funds, and outgoing Prime Minister Michel Barnier had to abandon proposals for new taxes on electricity supplies just days before being ousted.
The resulting power vacuum now clouds the outlook for the entire energy generation and distribution sector, as EDF still needs regular and sizeable investments just to maintain the country’s aging nuclear fleet and power grids.
RECORD EXPORTS NOW IN JEOPARDY
The relatively low cost of French nuclear generation has allowed the country to enjoy sharply lower power prices than its neighbours, and the means to export surplus electricity into interconnected markets.
So far in 2024, France’s wholesale power prices have averaged around 25% less than those of Germany and The Netherlands, and 45% less than Italy’s, according to LSEG.
That cost differential has motivated French power traders to export surplus supplies at a tidy profit.
However, any forced cuts to France’s power generation tied to budget tussles could quickly curtail electricity exports.
And no other nation is capable of replacing France’s electricity supplies at such low cost.
Over the first eleven months of 2024, France exported nearly 84 terawatt hours (TWh) of electricity to neighbouring nations, according to energy-charts.info.
That export tally was 85% more than during the same period in 2023, and the highest for that period on records going back to 2015.
The country’s mammoth nuclear fleet – the largest in Europe – has been the key driver of those exports, with nuclear-powered generation climbing by around 12% from 2023’s levels to three-year highs in 2024, according to LSEG.
A 31% jump in hydro power output to the highest in over a decade has also helped fuel French generation and exports.
However, both nuclear and hydro production are already approaching the upper limits of historical output levels, and so are at risk of reduction during any protracted political impasse or due to funding cuts.
GRIDLOCKED
Germany and Italy are two of Europe’s largest electricity importers, and will be particularly impacted by any loss of French power flows.
Both countries have large natural gas-fired power plant networks that have been hit hard by the drop in Russian gas supplies since 2022.
And Germany and Italy have stepped up imports of liquefied natural gas (LNG) in recent years in an attempt to restore domestic energy production.
But the sharply higher cost of LNG compared to pipelined supplies has meant that industries reliant on gas for power or as a feedstock have seen costs balloon.
Those surging costs have driven an acceleration in the electrification of energy consumption, and a surge in electricity imports by nearly all European nations.
So far, France has been able to supply most of that needed electricity, and helped keep regional electricity costs in check.
But if France’s power system loses steam as a result of the impending political skirmish, electricity importers may be faced with a drop in available supplies and surging power costs that could ignite a fresh regional energy crisis.
The opinions expressed here are those of the author, a market analyst for Reuters.
This post is originally published on INVESTING.
