Changes in electricity prices in the residential sector in France (Note)

Usefulness of the article: The rise in electricity prices in France in recent years raises questions about energy poverty among French households. This article analyzes the evolution of electricity prices in the residential sector in order to better understand the factors that have influenced their evolution over the last few decades.

Summary:

• The price per kWh in France remained significantly lower than the European average over the period 2000–2018, but is now among the highest.
• It remained at a relatively low and stable level until 2009, thanks to the efficiency of nuclear and hydroelectric power generation, as well as the French government’s desire to keep prices down.
• Since 2009, the price has risen due to an increase in the tax borne mainly by households to finance the additional cost of renewable energies. This phenomenon is common in almost all European countries that support the energy transition policy.

According to data from INSEE and SDES in 2018, energy is a significant item of household consumption, accounting for an average of 8.5% of their expenditure: 4.4% for their home (mainly for gas and electricity bills) and 4.1% for their individual means of transport. According to ADEME, the 5 million most modest French households spend 15% of their income on these energy expenses (in a situation of energy poverty), compared to only 6% for the wealthiest households.

Given the general trend of rising energy prices, particularly for electricity, and the increase in electricity consumption due to larger and better-equipped homes[1], it is to be expected that electricity bills will account for an increasingly large share of French households’ expenses, particularly those in energy poverty. It therefore seems legitimate to analyze electricity prices in the residential sector in France and to examine the factors that have influenced their evolution over the last few decades.

Electricity prices in France are now among the highest in Europe (EU-27)

In 2012, the price of electricity for average-sized households in France was the lowest in Europe (Figure 1). Five years later, due to a combination of economic and political factors (detailed below), France ranks among the countries with the highest electricity prices in the EU-27 (after Denmark, Germany, Belgium, Ireland, Spain, and Portugal), according to Eurostat data for 2018.

Figure 1. Electricity prices for average-sized households (€/kWh) in 2012 and 2017

This change in French electricity prices and the disparity between European countries are the result of a variety of economic and regulatory factors, some of which are common to the EU as a whole, while others are specific to the French political and economic context.

French electricity prices, which remained virtually stable and low for a decade, have undergone a very significant change in recent years

In order to understand the evolution of electricity prices in the residential sector in France, it is necessary to emphasize that these prices are distinct from those on the wholesale market, which, in theory, are determined mainly by the marginal cost of production—and are therefore almost aligned with those of gas or coal (see more details here). The wholesale price for distributors and large consumers largely follows market mechanisms, while the price for individuals is mainly regulated by the government. The latter is composed of average production costs, transportation costs, and taxes, which represent 37%, 30%, and 33% of the electricity bill in 2018, respectively, according to the Energy Regulatory Commission.

Figure 2 shows that the price of electricity in France over the last two decades has remained below the European average[2], both for the pre-tax portion and for the price including tax. The price per kWh in Europe, as in France, remained virtually stable until 2005, before rising significantly. The price per kWh in France, meanwhile, only began to rise in 2009.

Figure 2. Price per kWh for domestic customers in France and Europe (EU-15)

Source: Eurostat (2018)

In fact, the price per kWh in France between 1994 and 2009 changed only marginally in nominal terms (around €0.9/kWh), despite tensions surrounding fuel prices over the same period (such as the price of oil, which rose from $20 per barrel in 1999 to around $140 in 2008). There are two main reasons for this:

• The cost of electricity production is relatively low in France, thanks to nuclear and hydroelectric power, which account for 90% of the French electricity mix. On the one hand, these energy sources likely enable low production costs, as their average costs have been considered lower than those of gas or coal. In particular, the operation of existing nuclear power plants allows for low prices, given that a large part of the fixed costs have been amortized. On the other hand, these costs have been little affected by the increase in fossil fuel prices and virtually unaffected by the integration of carbon prices since 2005, since nuclear power is a low-carbon energy source.
• The price per kWh has been deliberately frozen: in fact, electricity sales prices were regulated and set by ministerial decree until 2007, in the name of the competitiveness of the nuclear fleet, but without being adjusted for the actual costs of production and transmission.

Since July 1, 2007, competition has emerged in offers to domestic customers: all consumers have become « eligible » and free to choose their supplier, although they can retain a regulated tariff (or return to it after a period of six months after opting for a commercial offer). Despite the opening up of competition, the regulated tariff has remained below the market price, which explains why 97.7% of domestic customers remained under the regulated tariff regime in 2009.

Since 2009, the price per kWh in the residential market in France has begun to rise, both for the pre-tax price and the post-tax price. However, the gap between these two prices has also widened, meaning that while the price has been adjusted very slightly upwards for the supply and transmission component (from €0.91/kWh in 2009 to €0.11/kWh in 2018), the increase in the share of taxes has been the main factor in the rise in the price of electricity supplied in France since 2009.

The share of taxes in the electricity bill for private individuals in France has more than doubled since 2009

In addition to the costs of producing, transporting, and marketing electricity, there are four taxes on end consumers’ bills, which apply equally to all electricity suppliers. While some apply to subscriptions—the fixed part of the bill (CTA, VAT)—others apply to consumption—the variable part (CSPE, VAT, and TCFE).

• VAT : 20% on the price per kWh and 5.5% on the subscription. In 2018, this tax represents around 40% of the total tax and 15% of the final bill.
• The CTA (or transmission tariff contribution), which represents only 5.4% of the total tax and 1.9% of the bill. Used to finance specific rights relating to old-age insurance for employees in the electricity and gas industries, it is calculated on the basis of the fixed portion of the electricity transmission tariff, which has increased slightly since 2000.
• The TCFE (or tax on final electricity consumption) is a local tax paid to municipalities. While the state sets a range for this tax, municipalities apply a coefficient according to their needs. In 2018, the TCFE (max.) represents approximately 15% of the total tax and 5.6% of the final bill.
• The CSPE (or contribution to the public electricity service) is the most complex tax. It represents 36.86% of the total tax and 13.26% of the price per kWh in 2018. It finances the costs incurred by the public electricity service:
• The cost of support mechanisms for renewable energies (ENR), whose production is purchased at a guaranteed tariff higher than the market price. The difference between the market price and the tariff paid to renewable energy producers is financed by the CSPE.
• Tariff equalization aims to support consumers in Corsica and overseas territories, where the price per kWh is high due to high production costs. This mechanism allows equal tariffs to be applied throughout France.
• 
  The basic needs tariff, which is a flat-rate subsidy granted to households in energy poverty.

The issue of renewable energies

Among the variable taxes, it should be noted that the TCFE is adjusted each year in line with inflation, which is currently moderate, while the CSPE has been rising steadily since 2010 as a result of the development of renewable energies (and is expected to continue to grow in the coming years). The CSPE and its renewable energy support component are therefore a major factor in the evolution of French electricity prices. However, it is important to note that this price increase linked to the financing of renewable energy is also a common phenomenon in European countries implementing an energy transition policy with a view to subsidizing renewable energy producers. The evolution of this tax in electricity bills in Europe (EU-15) has been even more remarkable, particularly in Germany.

Electricity produced from renewable energy sources is paid for outside the market at high guaranteed prices, with priority access to the grid. It also leads to lower electricity prices for industrial consumers on the wholesale electricity market, thanks to zero marginal costs. Given the very strong interconnection between France and Germany, a similar effect could occur on a cross-border scale. This means that the massive integration of renewable electricity at zero marginal cost into the German electricity market could also lead to lower electricity prices on the French wholesale electricity market.

Conventional electricity producers therefore remain the losers, as they sell less electricity at a lower price. End consumers who purchase electricity at a price that is not indexed to the wholesale price (residential electricity tariffs) are the losers, as they bear the additional cost of subsidies for renewable energies (the CSPE in France or the EEG-Umlage tax in Germany).

Industrial consumers who purchase electricity at market prices are winners, especially since they are often exempt from taxes intended to finance the additional cost of renewable energies. While tax exemptions for large companies are an important policy tool for supporting the competitiveness of French businesses, this tax could also have taken into account the fall in market prices due to the injection of renewable energy, subsidized by end consumers.

Conclusion

The price of electricity in the residential sector in France has remained virtually unchanged for two decades (1990-2010), at a remarkably low level and below the European average price. On the one hand, the cost of electricity production is relatively low in France thanks to the competitiveness of nuclear and hydroelectric power (which accounts for 90% of the French electricity mix). On the other hand, the price per kWh, which has been politically blocked to protect consumers from tensions in the energy market, does not reflect market reality.

Nevertheless, the price of electricity including tax in the French residential sector has changed significantly in recent years, mainly due to a tax increase intended to finance the additional cost of renewable energies. The increase in renewable energy in the electricity mix in the coming years will go hand in hand with an increase in the final bill and is likely to continue if the subsidy for renewable energy is not fairly distributed between different types of consumers and producers.