FRANCE: ENERGY SECTOR UPDATE

UNCLAS SECTION 01 OF 03 PARIS 003336 SIPDIS SENSITIVE SIPDIS STATE FOR EUR/WE; OES; NP; EB/ESC, AND EB/CBA USDOC FOR 4212/MAC/EUR/OEURA DOE FOR ROBERT PRICE PI-32 AND KP LAU NE-80 E.O. 12958: N/A TAGS: ENRG EPET EIND EINV PREL PGOV FR SUBJECT: FRANCE: ENERGY SECTOR UPDATE NOT FOR INTERNET DISTRIBUTION ¶1. (U) This is the latest in a series of periodic updates on the French energy sector. Feedback is welcome to help us make this product as useful as possible for our inter-agency USG audience. CONTENTS: -- Areva wins 5 billion USD contract in China, but agreement postponed (para. 2) -- EDF partners with Constellation Energy in the U.S. (para. 3) -- Areva to provide civil reactor to Libya (para. 4) -- France looking to sign nuclear cooperation deal with India (para. 5) -- France to help the United Arab Emirates launch a nuclear power program; begins discussions on nuclear cooperation with Algeria (para. 6) -- Total signs gas deal in Russia (para. 7) -- Liberalization of the French energy market - modest results so far (para. 8) -- EU Commission opens new procedures against EDF, GDF, and Electrabel (para.9) -- France warns EU against energy unbundling (para. 10) -- Draft amendment on regulated rates in the works (para. 11) AREVA WINS 5 BILLION USD CONTRACT IN CHINA, BUT AGREEMENT POSTPONED ¶2. (U) On July 26, French nuclear giant Areva confirmed the preliminary conclusion of an agreement with China Guangdong Nuclear Power Corporation (CGNPC) to build two European Pressurized Reactors (EPR),each with a 1,600 megawatt capacity. By far the biggest and most important contract signed in Areva's history, the agreement was also hailed in the press as a "consolation" for the loss in December 2006 of a sought-after contract for four reactors in China, valued at 4.6 billion euros and given to Westinghouse. The conclusion of the agreement, which should have taken place on July 31 in Beijing, has been postponed for "technical" reasons. Although both Areva and CGNPC have indicated that a formal letter of intent will be signed soon, no date has been set. Under the terms of the agreement, Areva would provide the reactors, the fuel, and the necessary services for two third-generation reactors in Guangdong for 5 billion USD (3.6 billion euros). Areva is building the first version of its third-generation EPR in Finland (to go into service in 2010-2011), with a second under construction in Flamanville, Normandy (to become operational in 2012). Last June, the French group filed for design approval in the UK where EDF wants to build as many as four similar reactors. The next stage is the United States. EDF PARTNERS WITH CONSTELLATION ENERGY IN THE U.S. ¶3. (U) Pierre Gadonneix, CEO of Electricite de France, announced July 12 that EDF had partnered with American firm Constellation Energy to construct third-generation EPR reactors in the United States. The American energy market is a "formidable growth opportunity" for EDF, he said, particularly as the United States looks to augment its productive capacity and explore renewable sources of energy. EDF purchased a 9.9% stake in Constellation, and agreed to invest 350 million USD initially, with the possibility of another 275 million USD investment after the project is reviewed by the Nuclear Regulatory Commission. Constellation submitted environmental plans July 13 to the NRC for a single 1,600 megawatt reactor in Calvert Cliffs, Maryland, which could cost close to 4 billion USD to complete. Gadonneix noted a degree of renewed interest in nuclear energy in the United States, as private and government actors seek to reduce dependency on oil and gas. He cited EDF's "unparalleled experience and expertise" in the production of nuclear energy as a way to calm public fears about the risks associated with nuclear power. AREVA TO PROVIDE CIVIL REACTOR TO LIBYA ¶4. (U) During his July 25 visit to Tripoli, French President Nicholas Sarkozy signed a memorandum of understanding under which French nuclear giant Areva would provide Libya with a civil reactor to desalinate water. Areva confirmed that Libyan authorities had approached them in 2006, and that negotiations for the project - which could take years to complete - were still in the preliminary stages. France's offer of nuclear cooperation with the oil-exporting North African state has angered some German officials, who see it as yet another example of Sarkozy's "go-it-alone" approach to foreign policy. The French press reported that Deputy Foreign Minister Gernot Erler had called the deal "politically problematic" and noted that German interests were directly affected, since Germany's Siemens group owns 34% of Areva's nuclear power PARIS 00003336 002 OF 003 division. FRANCE LOOKING TO SIGN NUCLEAR COOPERATION DEAL WITH INDIA ¶5. (U) France is working hard with India towards a nuclear energy cooperation deal, following the agreement of a draft deal between the United States and India. France has also offered to help the United Arab Emirates launch a nuclear power program. Senior advisers to the French president and the Indian prime minister met in New Delhi on July 30 for a consultation session on the Indo-French strategic partnership. According to a statement from the French Embassy in New Delhi, the parties "stressed their common endeavor to develop nuclear energy for peaceful purposes," and "agreed to conclude expeditiously a bilateral cooperation agreement thereof." Jean-David Levitte, diplomatic adviser to the French president, invited India's Prime Minister Manmohan Singh to visit France in 2008, and Singh has invited President Sarkozy to visit India "at an early date." FRANCE TO HELP THE UNITED ARAB EMIRATES LAUNCH A NUCLEAR POWER PROGRAM; BEGINS DISCUSSIONS ON NUCLEAR COOPERATION WITH ALGERIA ¶6. (U) Talks on July 20 in Paris between Sarkozy and President of the United Arab Emirates Shaikh Khalifa bin Zayed Al Nahyan concluded with the two countries agreeing to put into effect a 1980 agreement to help the UAE launch its own nuclear power program. The UAE is a member of the Gulf Cooperation Council, which has expressed interest in developing a shared nuclear program for the region. In a visit to Algiers a week earlier, designed to launch his initiative for a Mediterranean regional union, Sarkozy also announced that future sharing of civilian nuclear expertise between France and Algeria had been a key topic of discussion. TOTAL SIGNS GAS DEAL IN RUSSIA ¶7. (U) It took ten years to negotiate and a phone call between Nicolas Sarkozy and Vladimir Putin, but the announcement finally came on July 12: Total has been chosen over its two competitors, ConocoPhillips and Norsk Hydro to develop the Shtokman natural gas field, one of the largest in the world. The Shtokman gas deposit, situated 340 miles offshore in the Russian Arctic, holds 3.7 trillion cubic meters of natural gas, enough to supply the European Union for seven years. Total's offshore expertise proved an effective bargaining chip, as the site is reported to be one of the most technically challenging in the world. Initial estimates place the cost of infrastructure development around 15 billion USD. The field is expected to begin producing in 2013. Total will have a 25% stake in the operating company, an additional 24% possibly going to another foreign group, while Gazprom will control at least 51% of the operating company and, significantly, 100% of the underlying reserves. Total will have no say over where the gas produced is sold. Total's CEO, Christophe de Margerie, noted that being partnered with Gazprom could serve as protection from the "forced nationalization" that Royal Dutch Shell and BP were recently hit with in December and June. De Margerie also emphasized the importance of the deal as a first step toward other projects in Russia, where Total has not previously been very active. LIBERALIZATION OF THE FRENCH ENERGY MARKET - MODEST RESULTS SO FAR ¶8. (U) On July 1 the French energy market, the exclusive domain of Electricite de France and Gaz de France since 1946, opened to competition. Eight new energy providers entered the market. As of the end of July, however, only 309 French household customers have switched to suppliers selling power at liberalized prices, according to Patricia de Suzzoni, Director of Markets at the Energy Regulation Commission (CRE). Speaking at a recent debate held by oil and energy publisher BIP-Enerpresse, she said the number of calls to CRE's information helpline had risen to 1,200 per day in the past ten days from 1,200 per month previously. The fact customers cannot switch back to regulated prices again is something that seems to pose a problem to consumer associations, she explained. France's leading consumer advocate group UFC-Que Choisir raised the possibility that consumers risked significant increases in their energy bills in leaving former electricity and gas monopolies EDF and GDF. Complaints of skyrocketing prices from industrial energy consumers, who have had a choice of provider since 2000 and have seen their energy expenses increase by 75 percent in some cases, fueled such fears. EDF's regulated rates are approximately 20 euros below market price for a megawatt hour, the lowest in Europe, and overall satisfaction with EDF and GDF remains high. Both providers have reassured consumers that prices will not increase in the near future; GDF promised not to raise its rates over "the next few months," while EDF's contract with the French government stipulates that its prices can only be raised to keep pace with inflation until PARIS 00003336 003 OF 003 ¶2010. Once consumers opt for one of the new electricity or gas providers, they cannot return to EDF or GDF and their regulated rates. Thus, consumers have a strong incentive to remain with the historical providers for the time being. FRANCE WARNS EU AGAINST ENERGY UNBUNDLING ¶9. (U) France and eight other European countries have written to the EU Commission warning against a proposal to break-up utilities. French Ecology, Sustainable Development and Planning Minister Jean-Louis Borloo, whose responsibilities include energy issues, drafted the letter, arguing that "the ownership unbundling between network grids and commercial activities has not been successful." He added that break-up brought no guarantee of low prices or sufficient investment. Supported by Germany, Austria, Bulgaria, Slovakia, Cyprus, Greece, Luxembourg and Latvia, the letter was timed to sway the EU Commission in the final phase of drafting legislation to implement a new energy and climate change strategy agreed by EU leaders in March. Borloo's letter is designed to counter a June letter by Britain, the Netherlands, Denmark and Sweden urging the Commission to stick to the idea of the break-up of the EU's energy giants. France is particularly concerned that EDF, which controls both the production and supply networks, would be seriously weakened by such a move, and prefers an approach which would maintain the company intact, but regulate power distribution grids from separately from other activities. EU COMMISSION OPENS NEW PROCEDURES AGAINST EDF, GDF, AND ELECTRABEL ¶10. (U) The EU Commissioner for Competition announced July 27 that Electricite de France and Electrabel, the Belgian subsidiary of French-owned Suez, were under investigation for possible abuse of their dominant positions in their respective markets. EDF and Electrabel have for years signed "atypical" contracts with industrial customers who consume the most energy, such as paper, aluminum, and chemical manufacturers. In exchange for signing long-term (15-20 years) agreements, the consumer receives a lower price. The EU Commission believes such contracts block the entrance of new providers and should therefore be reviewed. The Commission also referenced "understandings" between EDF and Electrabel, but it was unclear if this referred explicitly to collaboration between the two firms to protect their market shares. EDF and Electrabel declared themselves ready to cooperate with the investigation, which could take a year or more. Similarly, the EU Commission opened formal procedures against GDF and German gas company E.ON, suspected of collaborating to protect their shares of the French and German gas markets. Under the alleged agreement, the two companies promised to keep out of each other's national markets, and may have illegally fixed the division of Russian gas coming to southern Germany and France via the only pipeline that transports Russian gas to France. DRAFT AMENDMENT ON REGULATED RATES IN THE WORKS ¶11. (U) French Senator Ladislas Ponitowski of the center-right UMP Party has introduced a draft bill in late July, with the approval of the government, to modify the current law on regulated energy tariffs tying contracts to places of residence rather than to individuals. Since the full liberalization of the French energy market, residential customers have had the option of switching from EDF and GDF's regulated rates to market-based prices. However, under the existing law, the decision to abandon regulated rates is tied to the place of residence, so that subsequent owners or occupiers are forced to accept the market-based contract chosen by the previous residents. The Senate hopes that these changes can be implemented some time this fall. Pekala