The Last Year of the ARENH Mechanism
Share on LinkedIn8 Jul 2024
One-third of the electricity consumed in France is allotted through the ARENH scheme, yet 2025 will be the last year it operates. One final time, businesses in France may find themselves wondering whether to opt for a regulated contract or a market-based contract. Understanding the ARENH mechanism is key to navigating this binary choice.
The acronym ARENH stands for Regulated Access to Historic Nuclear Energy in the original French. It emerged in the early 2010s at a time when French authorities looked for ways to join the competitive energy market crafted under EU auspices. France has approximately 56 nuclear reactors, but the lion’s share of the resulting electricity isn’t sold on the wholesale market or to neighbouring markets. France’s nuclear fleet has undergirded several regulated supply schemes throughout the years and until 2011, most businesses qualified for one of those schemes. But compliance with European market regulations meant transitioning to a liberalised model. France’s answer was ARENH - a compromise between a liberalised and a regulated price backed by cheap nuclear electricity volumes.
Civilian nuclear production assets are operated by EDF but it would be a mistake to assume they’re the only supplier. Since the ARENH scheme is jointly governed by all suppliers, ARENH-Regulated contracts are widely available. Their advantage is, first and foremost, financial. While EDF commits to deliver volumes for the ARENH scheme at the regulated ARENH rate of 42€/MWh, the supplier agrees to provide consumers a contractual framework and purchase any additional volumes. An exemption of up to 100% on the Capacity Fee is also included in all ARENH-Regulated contracts. These two opportunities are what make the ARENH such an attractive option.
Each delivery point is associated with a unique ‘ARENH Allocation’, an amount of power made available via the scheme at the regulated rate – the higher the Allocation, the lower the eventual electricity price. Company-wide, this can mean different results for separate locations – a problem only alleviated by merging all of them onto the same supply contract. Worse, the scheme wasn’t designed to accommodate overall consumer demand (which is traditionally high when market prices exceed the AREHN rate) and is balanced by a strict process of capping, called écrêtement. By mid-November, the authorities determine the shortfall required to bring the total allocated volume for the upcoming year under the threshold. Suppliers must then buy the volume to offset it – the resulting cost is passed on to the consumer as a premium. Though all ARENH contracts are affected, suppliers vary in how they deal with the additional purchasing. This can create significant disparities and complications for consumers.
The result is a price with inherent risks: a regulatory framework that might change, as EDF would like to see happen to their advantage; a deadline requiring consumers to finalise a contract by mid-October in order to benefit from ARENH in the following year; and exposure to the market in November- December (often an unsettled time) in the form of the écrêtement premium. The latter flaw at least has been acknowledged by suppliers, who increasingly provide alternate solutions to insulate consumers from high premiums.
Adding to the uncertainty, ARENH Allocations are reset nationwide every year. Each year’s Allocation is determined by measuring consumption in July and August from 1 am to 7 am - the ‘hours of lowest demand’. In other words, the razor employed by the designers of the ARENH is to take as the baseline the volume consumed at times when demand is expected to be low: the more your consumption is stable in all hours of the day, the further your ARENH Allocation will go. On one hand, this ensures the effective subsidy baked into the ARENH price is used effectively. A nuclear reactor’s output is stable and continuous – they can run uninterrupted, but their output has a hard upper limit. It’s a natural fit for consumer’s ‘core’ consumption.
On the other hand, this isn’t a particularly impartial methodology. Businesses whose activity fluctuates from one month (or one year) to the next cannot be sure an ARENH-regulated contract will be as effective the next year. A lack of guardrails to prevent windfalls for industries whose consumption surges in July and August is also a concern. This bias seems to fly in the face of the stated rationale of the scheme. However, the sheer difficulty of pivoting consumption to ‘lowest demand hours’ means maximizing ARENH in this way remains an inconvenient loophole for most users.
The scheme will soon reach its planned end date of 2025; nevertheless, hints of what’s to come are hard to come by. On the one hand, ARENH has acted as an emergency brake on French electricity prices for years, compared with neighbouring markets. It came as no surprise that 2022 saw the government increase ARENH to support businesses struggling with inflation – the threshold was increased by 20% that year. There have been signals that the French government planned to continue in this vein. But the relationship between France, EDF & the EU isn’t what it was a decade ago, following EDF’s newly minted status as a state-owned company and a broader wave of criticism of the EU’s energy policy. These may partly explain electoral success of France’s far right, which has made it’s opposition to the shared energy market known. A prudent hybrid solution in the mold of the ARENH has long been in discussion for 2026 and beyond – whether political headwinds have made that obsolete remains to be seen. Whatever the outcome, NUS is cautioning businesses to expect a significant change in the French market structure, which will impact the post-2025 period.
More: Market Updates, ARENH
