French competition authority expresses concerns about government proposals on electricity Demand Side Response

14 January 2014

The French competition authority was not convinced that a consumer surcharge to subsidise DSR would achieve the desired effect. It also made a number of recommendations to ensure fairness among DSR providers.

On 13 January, the French competition authority published an opinion: http://www.autoritedelaconcurrence.fr/pdf/avis/13a25.pdf , issued on 20 December, on the subject of proposed secondary legislation setting out the rules for electricity Demand Side Response.

DSR

Demand Side Response ("effacement de consommation") is the process by which the consumption of electricity by one or more users can be temporarily reduced in response to a request by a Demand Side Response provider. There are a number of means by which this can be done, including devices connected to the consumer meter and consumption units, which can be activated remotely to reduce demand. Alternatively the provider can send a signal to the consumer requesting it to reduce consumption in return for a reduction in its charges.

In competition terms, DSR is a two-sided market, in which an intermediary (in this case the DSR provider) assembles a base of consumers whose potential demand reduction it can offer on various markets in France. These markets include, in theory, the balancing market operated by the transmission system operator RTE (currently only for large consumers until a legislative framework for small-scale aggregated DSR is developed) the reserve market, the capacity mechanism when it is introduced in 2016 and the wholesale electricity market, although in this case only in the context of "implicit" supply within a supplier portfolio rather than "explicitly" on the open wholesale market. There are therefore currently limited opportunities for the supply of DSR.

The new regulatory framework

Until now, DSR has developed through the balancing mechanism rules proposed by RTE and adopted by the regulator. Now the government proposes a permanent regulatory structure. Law 2013-312 of 15 April 2013 provides that DSR may be sold on the balancing and wholesale markets. DSR providers may sell DSR units ("NEBEF") on the wholesale market. A DSR provider must be permitted to carry out demand reduction without the consent of the supplier of the premises. A DSR provider must compensate the supplier of the premises whose demand is reduced, taking into account the quantities of electricity supplied by the supplier and sold by the DSR provider. A subsidy is paid to DSR providers whose activities contribute to defined energy policy objectives.

The Law provides that the details of these arrangements are to be set out in a decree.

Concerns of the competition authority

The French competition authority had a number of concerns.

First, it was not satisfied that the subsidy paid to DSR providers would have the desired environmental objective so as to compensate for the costs to consumers and the possible distortions of competition that it would cause. The authority recommended that the government should not put in place the subsidy mechanism in its proposed form, but only in a form that compensates for demonstrable benefits which are not otherwise compensated for, and that does not discriminate against certain providers. In particular, the Authority queried whether the subsidy should be paid to EDF for certain existing arrangements. In any event, the Authority recommended that the subsidy should be notified to the European Commission for state aid clearance.

The Authority concluded that at first sight the payments meet the conditions for being treated as state aid under Article 107 TFEU. In particular, it noted that the payments are imputable to the French state, being established by law, and are also under the control of the state, because they pass through the Caisse des dépôts et consignations (CDC), a public body. This is the body that featured in the important 19 December judgment of the European Court of Justice in Case

C-262/12 Vent de Colère v. Ministre de l'Écologie etc. The Authority also took the view that the measure was selective, conferred an advantage on the recipients and threatened to affect trade between Member States.

Second, the Authority was concerned at the proposal that RTE should be able to delegate its functions of approving DSR providers and certifying DSR volumes to the distribution network operators, who are currently not sufficiently independent from certain suppliers, who are also potential DSR providers.

Third, the Authority considered that network operators, who have a role in administering the DSR regime, should not be permitted to act as DSR providers.

Fourth, the Authority was concerned at the role of EDF. The DSR market could represent up to 15 or 20GW, the equivalent of 15 or so nuclear plants. It was not the function of the Authority, in the context of a request for an opinion, to conduct an investigation under Articles 101 and 102 TFEU or their French counterparts. However, in assessing the proposed rules, it was necessary to consider the position of EDF. EDF has since before 2000 offered a number of supply contracts that include DSR options, including its "EJP" (effacement jour pointe, meaning "peak DSR") and "Tempo" tariffs. EDF accounts for some 92% of the residential supply market and 80% of the non-residential market. It therefore has very significant market power. On the DSR market, although there are a number of small suppliers, EDF accounts for a little more than 1 million contracts, representing potential DSR of a little under 2GW. It also benefits, as a result of its former monopoly status, from the 175Hz signal that allows it to communicate with meters. This gives it a decisive competitive advantage.

Two factors create a risk that EDF will be able to eliminate competitors from the DSR market. The Authority considered that EDF's customer database, resulting from its former monopoly status rather than competition on the merits, allows it to identify nearly all the consumers with the greatest potential for DSR, and to make offers that most closely respond to their requirements. The Authority also assessed the possibility of EDF engaging in tying activities, because the EJP and Tempo tariffs consist of elements of both supply and DSR. To address these concerns, the Authority concluded that EDF should provide part of its database to other DSR providers and split off its DSR activities into a separate subsidiary in order to permit analysis of costs by the French energy regulator, the CRE, and the Authority. It also proposed that RTE should trial and put into effect the provision of non-discriminatory access to the 175Hz signal for the benefit of all DSR providers.

Fifth, the Authority noted that the government had adopted the proposal that it made in its July 2012 opinion on DSR in the context of the balancing services market, that DSR providers should not be required to obtain the approval of the supplier of the relevant premises. It noted that the government had also extended the proposal to cover the entire DSR market, including the offer of DSR into the wholesale market.

Finally, the Authority addressed a number of further provisions of the proposed decree, including the treatment of presumed consent of consumers, the approach to the appointment of multiple DSR providers for the same premises and the procedure for determining the amount to be paid to the supplier of the premises.

Assessment

In the last few years, the French Competition Authority has led the way in applying the competition rules to new issues arising in the energy sector, with a series of decisions and opinions on issues such as the supply of tertiary reserves and DSR. DSR is the subject of considerable interest at present, being presented by the European Commission as a means of reducing the need for capacity mechanisms that distort competition. As can be seen from this opinion, however, the creation of a DSR market also has the potential to distort competition through the payments made to participants (which may amount to state aid), and through lack of separation between providers and grid operators.

Exploring the issues in more depth - Brussels conference

Bird & Bird is holding a conference in Brussels on 4 February, in which a number of the issues raised in this opinion, including the question of state intervention in energy markets, state aid and the regulatory framework for Demand Side Response, will be explored by an expert panel of speakers from the European Commission, the French TSO RTE, a DSR provider and other energy companies. For more information, please click here.

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