Universal Registration Document 2020

The operations are recorded as follows:

• sales of certificates are recognised in income when the auctions orover-the-counter sales take place;
• the cost of the capacity mechanism passed on to final customers through regulated sales tariffs and market-price offers is recognised in sales revenues as and when the electricity is delivered. In addition, the ARENH price, although it has not changed since first set up, is considered to have included a capacity value since 1 January 2017 when the capacity mechanism took effect, as the terms of transfer for the capacity guarantees associated with the ARENH system were defined by the CRE;
• stocks of certificates are stated either at their certification value (i.e. cost of certification by RTE) or at their purchase value on the markets;
• decreases in the stock of certificates are valued at the weighted average unit cost. The timing of recognition depends on the actor:

• for operators of installations, if the effective capacity is lower than the certified capacity, a liability (accrued expenses or provision) is recorded equivalent to the best estimate of the expense necessary to extinguish the obligation (rebalancing or settlement mechanism);
• for obligated actors, if there is a shortfall in the stocks of capacity certificates, a provision is recorded equivalent to the best estimate of the expense necessary to extinguish the obligation;
• at the closing date, if the realisable value of the stock of capacity certificates is lower than its net book value, impairment is recognised.

British system: The British capacity mechanism was introduced in 2014 to ensure security of electricity supply by providing a payment for reliable sources of capacity, alongside their electricity revenues, to ensure they deliver energy when needed. It is based on a system of auctions for operators, organised by the network operator “National Grid” to procure capacity 4 years ahead of delivery; delivery years run from 1 October to 30 September. Capacity operators which have been successful at the auctions are remunerated in the year ofdelivery out of a fund consisting of contributions from electricity suppliers.

The electricity suppliers’ contribution to this mechanism is proportional to their sales to customers in the peak period and the cost of capacity is passed on to final customers through their sale price.

EDF Energy is concerned by both aspects of this system, as an operator of electricity plants and a supplier.

For accounting purposes, the remuneration received in its capacity as an operator is recognised in sales revenues in the year of delivery, and the contribution paid to the mechanism in its capacity as an electricity supplier is recognised in energy purchases over the peak period. The cost of the capacity mechanism passed on to final customers is recognised in sales revenues as and when the electricity is delivered.

On 15 November 2018, the UK’s Capacity Market was suspended after a ruling by the European Court of Justice concluding that it did not comply with EU rules on state aid. No capacity market revenues were thus recognised for the suspension period in 2018.

On 24 October 2019, following an in-depth investigation, the European Commission reapproved the UK capacity market scheme under EU State aid rules. The decision enabled payments that had been suspended sinceNovember 2018 to be made. Suppliers were required to make back-payments of the capacity supplier charge in 2019 and capacity providers have recognised revenue for the whole suspension period with cash received in January andFebruary 2020.

Italian system: A capacity mechanism was set up in 2019 using rules approved in a decree of 28 June 2019 issued by the Economic Development Ministry.

This mechanism is based on an auction process organised by TERNA, the Italian transmission grid operator, for each delivery year. Operators of existing and future production or storage units can participate in the auctions. The operators of the capacities selected are paid through a fixed premium during one year for existing capacities and 15 years for future capacities. The fixed premium is paid during the delivery year.

The selected operator must offer its capacity on the day-ahead market (Mercatodel Giorno Prima) and the balancing market (Mercato per il Servizio diDispacciamento). If the selling price on these markets reaches a level exceeding a strike price defined by the Italian Regulatory Authority for Energy, Networks and Environment (ARERA), the operator must repay the surplus to TERNA.

Two auctions were held during 2019 for delivery dates set in 2022 and 2023, and Edison won 3.8GW for 2022 and 3.3GW for 2023 for an annual price of€75,000/MW for new capacities and €33,000/MW for existing capacities.Edison did not participate in any auction in 2020.

The fixed premium is recorded in income during the corresponding delivery year, and reduced if appropriate by any repayments made to TERNA, or if the power plant is unavailable.