2.2.1 Market regulation, political and legal risks

1A: Public policy developments in France and Europe.

Changes in public energy policies and the political framework of market regulation in the countries where the Group operates, such as the energy-climate act or the Multi-year Energy Programme (PPE) in France, or the “green deal” in Europe, are likely to lead to profound changes in the Group’ governance or business portfolio. These could hinder the Group’s development in relation to its competitors or undermine its ability to meet its commitment to climate protection.

Criticality in view of the control actions undertaken: Strong.

On 25 January 2019, the French Government presented a draft Multi-year Energy Programme (PPE) which sets out the trajectory for the next 10 years in terms of energy policy, and therefore ecological transition (see section 1.5.1.2 “Public service in France”).

In particular, in this context:

• the French Government has confirmed the objective of diversifying the electricity mix and reducing nuclear power to 50% of electricity production in France by 2035: to reduce nuclear power to 50% of the energy mix, 14 reactors could be shut down by 2035 (including the two at Fessenheim). This would represent a quarter of the reactors currently operating in France. The final version of the Multi-year Energy Programme (PPE) will indicate the criteria for identifying the sites of the reactors to be closed, which will serve as a basis for EDF’s proposal. It will ultimately be up to the government to identify which sites have priority;
• it could therefore be decided to shut down one or more reactors in the EDF fleet prematurely, not as a result of an industrial choice but as a result of the application of the Multi-year Energy Programme (PPE). Such decisions should lead to EDF being compensated for the harm suffered, as reiterated by the French Constitutional Council in a decision of 13 August 2015;
• in this respect, with regard to the Fessenheim nuclear power plant, on 30 September 2019, EDF sent the Minister responsible for ecological and solidarity transition and the Nuclear Safety Authority a request for the repeal of the operation and the declaration of permanent shutdown of the two reactors of the Fessenheim nuclear power plant, providing for the shutdown of reactor no. 1 on 22 February 2020 and reactor no. 2 on 30 June of the same year. The submission of this request and declaration follows the signing, on 27 September 2019, by the French State and EDF, of the protocol governing the State’s indemnification of EDF for the early closure of the Fessenheim power plant.
  
  

The energy-climate act was enacted on 8 November 2019. The act specifies the key points of the energy and ecological transition policy in France and updates the objectives set by the energy transition act for green growth (see section 1.5.1.2 “Public service in France”).

In particular:

• in terms of energy mix, the law ratifies the postponement to 2035 of the deadline for reducing the share of nuclear power in electricity production to 50%, thus providing a legal framework for the Multi-year Energy Programme (PPE) project mentioned above. The act also calls for a 40% reduction in fossil energy consumption compared to 2012 by 2030 (compared to 30% previously), as well as carbon neutrality in 2050, by dividing emissions by a factor of more than 6;
• it sets up a scheme to limit from 1 January 2022 the level of CO₂ emissions from installations generating electricity from fossil fuels, with the aim of closing down coal-fired power stations by 2022;
• it introduces a revision of the Arenh system allowing the French government to increase by decree the maximum overall volume of electricity that EDF can assign to alternative suppliers from 100 to 150TWh (“ARENH ceiling”) as of 1 January 2020. The Act also authorises the French government to revise the price of Arenh, without establishing a direct link between price increases and increases in the ceiling. However, the French government had not implemented these possibilities by the end of 2019;
• it also specifies the procedure concerning the Strategic Business Plan (PSE), which will have to cover both periods of the Multi-year Energy Programme (PPE), be made public (with the exception of information relating to business secrecy), and present the accompanying measures put in place for employees as a result of the closure of nuclear or thermal power stations. In the event that the Strategic Business Plan (PSE) is incompatible with the Multi-year Energy Programme (PPE), the act provides for a formal notice followed, if necessary, by sanctions.
  
  

The European legal framework, which notably organises the liberalisation of the energy sector and climate and energy policies, underwent significant changes in 2019 with the finalisation of the Clean Energy Package and is likely to evolve in the future, in particular through the “Green deal”, a flagship mechanism of the new European Commission likely to include key provisions for the energy sector in general and the EDF group in particular.

The Green Deal, according to the presentation made by the President of the European Commission to the European Parliament in December 2019, sets out the climate neutrality target for the EU by 2050, and includes measures such as:

• the revision of the EU Emissions Trading Scheme (EU-ETS) within the EU and a carbon floor price to bring about a meaningful and predictable price for CO₂;
• the introduction of a “carbon tax” (carbon inclusion mechanism) along the borders of the EU;
• the revision of the Energy Taxation Directive, which should lead to preferential tax treatment for low-carbon solutions such as CO₂-free electricity or hydrogen.
  
  

Developments relating to the European taxonomy for Sustainable Finance should also be taken into account. A key element in guiding investments is their consistency with the objective of long-term carbon neutrality. There is a risk that nuclear power could be excluded from the taxonomy, which would be detrimental to the fight against climate change.

These developments could be unfavourable to the Group and could adversely affect its ability to meet its commitment to climate protection. In particular, they could result in additional costs, not be in line with the Group’s development objectives, change the competitive environment in which the Group operates, change the level of regulated tariffs or affect the profitability of current or future production units or any of the Group’s other activities. In general, the legislative and regulatory framework put in place in France, in Europe or in the countries where EDF is present is likely to have a significant impact on the Group’s results or its business model.

Moreover, in terms of the governance or delimitation of its scope of activity that may be enforced, EDF could be affected by a limitation or loss of control of certain strategic and operational decisions that could have a negative impact on the outlook and profitability of its various activities (see section 1.5 “Legislative and regulatory environment”). At the same time, EDF may continue, in its capacity as shareholder, to bear certain risks, potential liabilities towards third parties and factors that may affect the profitability of assets. Finally, the competent authorities or certain States could, in order to preserve or promote competition on certain energy markets, take decisions that are contrary to the Group’s economic or financial interests or that impact its integrated operator model.

Finally, in the renewable energies field, EDF relies primarily on its EDF Renewables subsidiary (see section 1.4.1.5.4 “EDF Renewables”), which does business in numerous countries. The profitability of these developments often depends on the support and tendering policies implemented in the different countries. The Group cannot guarantee that these policies will not change in some of these countries in ways that will be detrimental to the profitability of investments.

1B: Evolution of the regulatory framework (ARENH, TRV, environmental regulations and SNBC).

A significant portion of the Group’s revenues comes from regulated activities. Thus, any change in regulated sales tariffs, the ARENH or the Tariffs for Using the Public Transmission and Distribution Networks (TURPE), or any change in the regulation of greenhouse gas emissions, and its consequences in terms of the price of CO₂ emission quotas, would be likely to affect the Group’s profitability and its ability to meet the challenges of energy transition by developing low-carbon energy solutions for the protection of the climate.

Criticality in view of the control actions undertaken: Strong.

In France, a significant portion of the EDF group’s revenues is based on regulated tariffs set by public authorities or regulatory authorities (Regulated Sales Tariffs –TRVE, Tariffs for Using the Public Transmission and Distribution Networks – TURPE). The law on the New Organisation of the Electricity Market (NOME law or nouvelle organisation du marché de l’électricité) has also introduced the Regulated Access to Electricity from the Existing Nuclear Fleet (ARENH), for the benefit of EDF’s competing electricity suppliers (See section 1.5 “Legislative and regulatory environment”).