February 1, 2018 / 4:28 PM / 10 months ago

French power-buying mechanism has failed to generate investment -regulator

* Regulator says mechanism led to arbitrage in power market

* ARENH mechanism expected to end in 2025

PARIS, Feb 1 (Reuters) - The market mechanism under which French electricity providers buy power from nuclear power stations managed by utility EDF has failed to stimulate enough investments in new plants, energy markets regulator CRE said on Thursday.

Authorities need to rethink how France’s upstream power sector can be structured to guarantee effective competition in the downstream retail market to benefit consumers.

The ARENH mechanism under which so-called alternative power suppliers can buy up to 100 terrawatt-hours of EDF’s nuclear output each year for a fixed price of 42 euros ($52.25) per megawatt-hour (MWh) was introduced in 2011 to spur competition.

Alternative suppliers in the French retail power market include Direct Energie, Italy’s ENI, French consumer goods retailer Casino and oil major Total through its subsidiary Total Spring.

Designed during a time when wholesale electricity prices were significantly higher than the cost of nuclear power generation, ARENH quickly lost its attractiveness when wholesale prices tumbled in 2015 and 2016, CRE said.

“One of the objectives of the ARENH, by its limited and transitory nature, was to encourage alternative suppliers to procure additional means of supply,” it said in the report.

“Feedback shows that the ARENH does not seem to provide sufficient incentives for the development of competition in the upstream market.”

CRE added that the situation is unlikely to change by 2025, when use of the mechanism is due to end.

A sharp rise in prices from the end of 2016 because of a high number of nuclear reactor outages led to alternative suppliers using ARENH to benefit from arbitrage opportunities contrary to the aims of the ARENH mechanism, CRE said.

The regulator said it has proposed measures to limit arbitrage but that only a decree from the government could change the methodology used for the price calculation, meaning that it would leave the price unchanged at 42 euros/MWh.

State-controlled EDF, which has called repeatedly for the system to be ditched because of its negative effect on the company’s balance sheet, said on Tuesday that its cost of nuclear power production was 32 euros/MWh.

The French year-ahead power price for 2019 delivery was at 39.45 euros/MWh in the wholesale market on Thursday, down 0.75 percent. ($1 = 0.8038 euros) (Reporting by Bate Felix and Benjamin Mallet; Editing by David Goodman)

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