The electricity sector, like numerous others in France, has been heavily affected by the economic shutdown due to the COVID-19 pandemic.
The first two weeks of confinement led to a reduction in electricity consumption in France of around 15 to 20% compared to the consumption usually observed at the same year period under equivalent weather conditions. Such a variation in electricity consumption over such a short period of time is unprecedented, the most recent significant drop in demand having been observed during the economic crisis of 2008-2009, when, in contrast, the contraction in demand spread over the long term, reaching a maximum of -5% from one year to the next.
Concomitantly, electricity prices on the wholesale markets dropped from EUR50-55/Mwh at the beginning of 2020 to around EUR20/Mwh at the end of March.
This distressed economic situation highly impacted the so-called “alternative” electricity suppliers in France, i.e., suppliers other than the incumbent operator, EDF, which entered the retail electricity market in France as a result of its opening up to competition. Several of these suppliers declared force majeure under the contracts entered into with EDF for buying nuclear electricity at a price which became too high compared to the wholesale market price. Several decisions have already been rendered on this issue by the French energy market regulator – Commission de regulation de l’énergie or “CRE”, the Conseil d’Etat (the highest administrative court on administrative matters) and the Commercial Court of Paris, but the legal battle is only just beginning and, given the amounts at stake, we can expect it will be long and bitter.
Main principles regulating the mechanism of access to “incumbent nuclear electricity”
The law on the new organization of the electricity market enacted on December 7, 2010 (the so-called “NOME Law”) allowed suppliers in continental metropolitan France to gain access to a share of EDF’s nuclear base load electricity output at a price reflecting the economic conditions of the established nuclear fleet (i.e. nuclear electricity produced by nuclear reactors in operation before the publication of the NOME Law) until December 31, 2025. This is referred to as the principle of “regulated access to incumbent nuclear electricity” (“ARENH”). The rationale of this mechanism was to set out regulated access for competitors to nuclear power from EDF's existing nuclear power plants in view of fostering competition on the retail electricity market in France largely dominated by EDF.
The general principle is that the economic conditions of access to the incumbent nuclear electricity must be equivalent to the conditions under which EDF generates electricity through its nuclear power plants. The ARENH tariff takes into account the return on capital, the exploitation costs, and the investment costs relating to the maintenance or extension of the operating life of nuclear plants as well as long-term expenses, including provisional costs of dismantling the nuclear power plants. The tariff of the electricity sold under the ARENH mechanism is set at EUR42/Mwh since January 1, 2012.
The total volume of electricity to be sold yearly under the ARENH mechanism is set at 100 Twh and could be increased up to 150 Twh. This represents approximately a quarter of the nuclear electricity produced by EDF. The volume of electricity to be sold to each supplier, based on the suppliers’ forecasts and the market competition conditions, is set by the ministers for energy and the economy upon proposal by the CRE.
The CRE establishes the maximum volume of electricity each supplier may buy under the ARENH mechanism annually. The CRE notifies each supplier of the volume it may buy several times a year. Such exchanges of information are set out by the transmission system operator (“TSO”) under the CRE’s supervision. The CRE hence plays, in the implementation of the ARENH mechanism, the role of “trusted third party” with the aim of avoiding direct exchange of information between EDF and alternative suppliers, who are both EDF’s customers and competitors.
Each supplier willing to benefit from the ARENH tariff is required to enter into a framework agreement with EDF (the “ARENH contract”), according to a model form agreement set out by a ministerial order (the “Model Framework Agreement”)
ARENH’s highs and lows
While between 2011 and 2014, the demand for ARENH was around 60-70Twh/year, low wholesale prices triggered sharp reductions in ARENH subscriptions the following years, which fell respectively to 16,1 Twh in 2015 and 0 in 2016. Subscriptions to ARENH subsequently increased and reached 82 MWh in 2017 and 94 Twh in 2018. In 2019, the 100 Twh cap was reached for the first time in ARENH’s history.
Since its creation, the ARENH mechanism has received heavy criticism. Economists underlined the possible windfall effect for the alternative suppliers that share the 100 Twh quota in the context of high wholesale market prices and noted that in practice alternative suppliers benefitted opportunistically from this windfall without investing in production assets, while the legislator’s primary intent was to encourage alternative suppliers to find means of supply in addition to production from installed nuclear power plants.
In 2017, the Court of Auditors stressed the loopholes in the ARENH mechanism. First, that EDF had no guarantee that its production costs would be covered whenever the market price is lower than the ARENH tariff, a situation which was not foreseen when the ARENH mechanism was enacted and which resulted, for example, in EDF being obliged in 2015 and 2016 to sell significant electricity volumes on the markets in the absence of subscription by alternative suppliers, at prices significantly lower than the production costs. Second, the fact that alternative suppliers may benefit from electricity at ARENH prices without bearing the long-term investment commitments that go with the nuclear generation plants. Third, the Court of Auditors noted that the investment from alternative suppliers in baseload power generation was almost inexistent and that these suppliers were therefore not prepared for the post-ARENH period. In light of these deficiencies, the Court of Auditors urged the Government to amend the ARENH mechanism, notably to remedy its asymmetric nature which gives alternative suppliers an option to subscribe only when market conditions are favorable, thus not sharing the risk relating to long-term investments with EDF. One of the Court of Auditors’ recommendations was therefore to adapt the ARENH so that alternative suppliers make a medium-term commitment to purchase ARENH volumes, taking into account economic conditions equivalent to those assumed by EDF.
The Government agreed with the Court of Auditors that the asymmetrical nature of the ARENH in favour of alternative suppliers was reinforced, but considered that providing for a medium-term commitment as requested by the Court would be difficult to implement since, on the one hand, certain alternative suppliers would not have sufficient financial standing to make such commitments and, on the other hand, this could prove penalizing for French consumers, notably French companies, which could no longer benefit from favorable market conditions in case of lower electricity prices as do their European competitors.
Eventually, the Government launched a public consultation on January 17, 2020 on the changes to be brought to the ARENH mechanism, which could in reality lead to the end of this mechanism and its replacement by a “price corridor” mechanism, with a floor and ceiling price.
The impact of the COVID-19 crisis on ARENH contracts and its consequences
The ARENH subscriptions exceeded the 100 Twh cap for 2020. Because of a good economic forecast for 2020 and high prices on the wholesale markets, 73 alternative suppliers submitted requests of up to 147 Mwh at the end of 2019. The CRE allocated the 100 Twh annual volume between these suppliers, thus allocating 68% of the requested ARENH volumes to each of them.
The drop in electricity consumption due to the sanitary crisis coupled with the fall in wholesale prices trapped the alternative suppliers having subscribed ARENH volumes in a “scissors effect”: they are bound by the ARENH contracts entered into with EDF to buy electricity at a price of EUR42, which they cannot sell in full to their customers and have therefore to dispose of the surplus on the wholesale markets, at average prices of around EUR20.
Several alternative suppliers have, in this context, invoked the existence of a force majeure event, which allows them to suspend the performance of the ARENH contracts for the duration of the force majeure event and, instead, buy electricity on the wholesale markets at prices significantly lower than those provided for in these contracts. EDF is opposed to the triggering of this clause, arguing that the conditions laid down in the ARENH contract are not met.
In a deliberation of March 26, 2020 relating to the measures in favor of suppliers to cope with the consequences of the sanitary crisis on the electricity and natural gas markets, the CRE considered that a supplier could only invoke a force majeure event if it is able to demonstrate that its economic situation makes it completely impossible to fulfil the ARENH payment obligations. Moreover, according to the CRE, “the consequences of a total suspension of the ARENH contracts due to the triggering of the force majeure provisions would be disproportionate [and] such a situation would create a windfall effect for suppliers to the detriment of EDF, which would go against the underlying principles of the mechanism, which are based on a firm commitment by the parties over a period of one year.”.
Nevertheless, the CRE envisaged the following mitigation measures:
- removal of the penalty mechanism to be applied to suppliers which subscribed ARENH volumes higher than their customer portfolio, since the difference between subscriptions and sales is not within the suppliers’ control;
- payment flexibility solutions as provided for by the Ordinance No. 2020-316 of March 25, 2020, which allows micro-enterprises whose activity is affected by the epidemic to benefit from a deferral or staggering of their electricity bills;
- additional payment facilities to be granted by EDF to certain suppliers, on a case-by-case basis.
Expert commentators highlighted the somewhat contradictory situation in which EDF finds itself as a result of the ARENH and the sanitary crisis: “a nurturing mother waiting for suppliers to come to it (demand has always been less than 100 Twh until 2018, and even nil in 2016), a dominant company required to respect the ARENH commitments (i.e. to supply its competitors, some of whom are asking for more supply), and now a benevolent company expected to help its unfortunate competitors”.
The Conseil d’Etat’s decision: the first stage of what is likely to be a long and complex legal battle
Two suppliers’ associations - the French Independent Association of Electricity and Gas (“AFIEG”) and France's National Association of Retail Energy Operators (“ANODE”) - lodged an appeal before the Conseil d’Etat with the aim of suspending the CRE’s deliberation of March 26, 2020.
The claimants argued that the current health crisis had the character of a force majeure event within the meaning of Article 10 of the Model Framework Agreement and contended that the implementation of the possibility to suspend in this case the execution of the framework agreements concluded between the suppliers and EDF is the sole decision of the party invoking force majeure and it may be implemented without the prior authorization of the competent court. According to the claimants, the court only needs to express its position in case the other party disputes the existence of a force majeure event. Therefore, the CRE has no other choice, when one of the parties expresses its wish to suspend the execution of the contract due to force majeure, than to draw the consequences of this decision in the notifications it sends to the TSO, and is not allowed to express a view as to whether invoking a force majeure event is relevant or not in the case at stake.
The Conseil d’Etat rejected this appeal by a decision of April 17, 2020 for lack of urgency, on the basis of the following reasoning:
- contrary to the claimant’s assertions, the CRE’s considerations on the impact of the suspension of the ARENH contracts on the electricity market are general considerations which do not constitute the grounds of the CRE’s refusal to notify the TSO and EDF of amended volumes of electricity to be delivered by EDF as a result of the implementation by the suppliers of the force majeure The CRE’s refusal is in reality only grounded on the acknowledgement of the existence of a dispute between the parties on the implementation of the force majeure, which can only be decided by the relevant court;
- the CRE’s interpretation on the implementation of the force majeure provision is not binding upon the court;
- assuming that despite the gains that could otherwise result from the long-term implementation of the ARENH mechanism, the purpose of which is to enable electricity suppliers to have a source of supply at a price usually lower than the market price, the losses suffered by the concerned electricity suppliers are of such a magnitude that they jeopardize, as it is argued, their survival within a few months, these suppliers have not established that these losses would have such an effect within the time necessary for the competent court to rule on the claims before it;
- the disputed deliberation in no way prevents suppliers, regardless of the implementation of the clause suspending the performance of the contracts due to force majeure, to negotiate with EDF, (pursuant to Article 19 of the Model Framework Agreement), derogatory terms for implementing the parties’ obligations, taking into account the particular circumstances linked to the health crisis.
First interim orders rendered by the Paris Commercial Court at the end of May 2020
Following the above-mentioned decision of the Conseil d’Etat, certain alternative electricity suppliers have launched interim procedures before the Paris Commercial Court, requesting the court to order EDF to cease the manifestly unlawful disturbance (trouble manifestement illicite, in French) it has been causing them, as a result of it rejecting the existence of a force majeure event and refusing to suspend the contracts.
The Paris Commercial Court has already pronounced two interim orders relating to Total Direct Energie and Gazel Energie, which have been published in the past few days.
Total Direct Energie and Gazel Energie requested the court to order the enforcement of the force majeure provision under their respective ARENH contracts, allowing them to suspend the performance of those contracts. Both have presented similar arguments in their respective claims:
- force majeure is defined in Article 10 of the ARENH contracts as being “an external event, which cannot be overcome, which was unforeseeable, and which renders the performance of the Parties' obligations in reasonable economic conditions, impossible”;
- the outbreak of COVID-19 and the French government’s measures taken to limit the spread of the epidemic fulfill the criteria set out under Article 10 and have prevented their main clients from taking delivery of the forecasted quantities of electricity they initially committed to take. The drastic fall in electricity consumption has forced the alternative electricity suppliers to resell the electricity at a loss, because of the impossibility to store the electricity;
- therefore, Total Direct Energie and Gazel Energie should be able to enforce the force majeure provision allowing them to suspend the obligation to take delivery and to suspend the payment obligation for the quantities of electricity not consumed; and
- EDF refusing to apply the force majeure provision constitutes a manifestly unlawful disturbance, which justifies the court to order the suspension of the contract, so as to avoid imminent damages resulting from the economic circumstances which have already been established and those that can be anticipated in the coming months.
For its defense, EDF has argued that Total Direct Energie and Gazel Energie's claims were ungrounded and that the two electricity suppliers should be dismissed from their claims, mainly on the basis of the following counterarguments:
- the claimants did not show evidence of their impossibility to perform their obligations under the ARENH contracts, which consist in taking delivery of the electricity and paying the relevant invoices;
- payment obligations are excluded from the scope of force majeure by law, under French law. Even under the relevant ARENH contracts, the drafting of Article 10 which refers to a non-defined concept of “reasonable economic conditions” does not show the parties' intent to contractually include payment obligations within the scope of force majeure. Therefore, the claimants cannot be excused from their obligation to pay under the ARENH contract for grounds of force majeure;
- the claimants have not demonstrated that the contracts cannot be performed in reasonable economic circumstances, neither have they provided evidence of the alleged losses and the existence of an imminent damage (stressing, in the Total Direct Energie case, the financial solidity of the company which is linked to a strong group and the failure to show the impact of the current situation on its accounts); and
- therefore, the criteria to validly claim force majeure not being met, the performance of the relevant ARENH contracts must be pursued.
The Paris Commercial Court rendered interim orders (ordonnances de référé, in French), on May 20, 2020 concerning Total Direct Energie  and on May 26, 2020 concerning Gazel Energie, in favor of the two alternative electricity suppliers. The court has upheld their claims, considering that:
- the force majeure provision was clear and did not raise interpretation issues, and that the criteria to enforce the force majeure clause were met. The spread of the COVID-19 consists in an event that is external to the parties, which was unforeseeable and which cannot be overcome. Moreover, the impossibility to perform the contract under reasonable economic circumstances is justified by the fact that the suppliers are constrained to buy the electricity at EUR42/MWh, whereas operating on the electricity market implies, because electricity is non-storable, an equal proportion between the quantities injected and the quantities used. The suppliers are confronted with a brutal and unforeseeable drop in consumption which has forced them to sell the quantities purchased from EDF at a significantly lower price; and
- EDF, by opposing to the application of Articles 10 (force majeure) and 13 (suspension) of the ARENH contracts, has contributed to the existence of a manifestly unlawful disturbance.
The Paris Commercial Court has ordered EDF not to oppose the application of the force majeure clause and the suspension provisions under the ARENH contracts and ordered EDF to suspend the supply of electricity.
EDF has announced that it will appeal the above-mentioned decisions.
What to expect in the coming weeks and months
Other interim orders will likely be rendered in the coming days, with respect to similar claims lodged by other alternative electricity suppliers. The Commercial Court will most probably render the same decisions as for Total Direct Energie and Gazel Energie. EDF has announced that it appealed the Commercial Court’s decisions, and if no amicable settlement is found between EDF and the alternative electricity suppliers, the matter will certainly continue for several months.
One may reasonably expect discussions and developments in the coming weeks and months, on two main legal topics concerning the performance issues relating to the ARENH contracts in the context of the COVID-19 pandemic:
- Discussions on the qualification of force majeure under the ARENH contracts
Interim orders (ordonnances de référé) are temporary decisions which aim at taking interim measures justified by an emergency. These decisions do not deal with the substance of a case and a separate claim can be lodged with the Commercial Court to judge on the merits. In addition, the interim orders can be appealed before the Court of Appeal. It is likely that EDF has initiated or will soon initiate both procedures.
Besides, the judges at the Commercial Courts in France are not professional judges, but business men and women who are elected by other tradesmen to settle commercial disputes, and who are not trained in law. The system has proved efficient in France for solving general commercial issues. However, the qualification of force majeure is a sensitive legal issue. Therefore, EDF will probably submit the question of the force majeure qualification to a Court of Appeal to be dealt with by career judges with a more legalistic approach.
The specificity here is that the contractual definition of force majeure under the ARENH contracts is more flexible than the common criteria under French law and is broadly drafted.
In the absence of a contractual definition, force majeure is characterized under French law cumulatively by:
- an event beyond the debtor's control (externality) – An event is considered to be external to the parties when it is not caused by and does not depend on them. The COVID-19 epidemic would be considered as an event which is beyond the control of the parties and is independent of their The measures taken by the government as a result of COVID-19 such as the closing of certain businesses would also be considered as beyond the parties’ control;
- an event which could not have been reasonably foreseen at the time of the entry into the contract (unforeseeability) – Since the disputed ARENH contracts were executed prior to February 29, 2020 (official declaration of the COVID-19 epidemic in France), the legal force majeure would apply without the need for the contract to expressly mention epidemics; and
- an event whose effects cannot be overcome by appropriate measures (impossibility) – The event must render the performance of the contract practically impossible and not merely more expensive or more complicated. The alternative electricity suppliers would have to demonstrate an absolute impediment to fulfill their two main obligations under the ARENH contracts, e. the obligation to take delivery of the electricity and the obligation to pay the relevant invoices for the quantities taken. It is worth noting that payment obligations are traditionally excluded from the exemption mechanism of force majeure and this has been confirmed by French case law. Unless the alternative suppliers could show evidence of an absolute impediment to take delivery of electricity and to pay the relevant invoices, force majeure will not be retained for failure to meet the “impossibility” criteria.
However, under Article 10 of the Model Framework Agreements, which refers to the impossibility to perform the obligations “in reasonable economic conditions”, the definition of force majeure is more flexible than the common criteria under French law, in particular concerning the third criterion.
The question is whether the professional judges will interpret the “impossibility to perform in reasonable economic conditions” as including payment obligations or not, and whether they will uphold the impossibility to fulfill the obligation to take delivery of the electricity given the impossibility of storage.
In all cases, any decision on the merits by the Commercial Court or an appeal decision by the Court of Appeal may take at least 6 months to be rendered.
- Renegotiation of recent ARENH contracts by invoking unforeseen circumstances (“imprévision” under article 1195 of the French Civil Code)
The theory of imprévision was introduced in Article 1195 of the French Civil Code in 2016. This provision sets out that “if a change of circumstances unforeseeable at the time of conclusion of the contract renders performance excessively onerous for a party who had not agreed to bear the risk, that party may request a renegotiation of the contract from the other contracting party. This party shall continue to perform its obligations during the renegotiation. In the event of refusal or failure of the renegotiation, the parties may agree to terminate the contract, on the date and under terms they determine, or request, by mutual agreement, the court to adapt the contract. If no agreement is reached within a reasonable period of time, the court may, at the request of one of the parties, revise or terminate the contract, on the date and under the conditions the court shall determine.”
Therefore, it is also to be expected that other electricity suppliers which have entered into ARENH contracts more recently, i.e. after the introduction of the above-mentioned 'unforseeability theory' under French law in October 2016, which see their obligations impacted by the COVID-19 epidemic, but without wishing to invoke force majeure, will request a renegotiation of the contract (revision or adaptation) in order to reduce the financial impact, or even its termination, as a result of an unforeseen change of circumstances rendering the performance of their obligations excessively onerous.
In a press release published on June 2, 2020, EDF announced that it has notified Total Direct Energie, Gazel Energie and Alpiq of the termination of their respective ARENH contracts , while recalling that it firmly objects to the existence of a force majeure event.
It will be interesting to see how the matter evolves in the coming weeks and months, and whether the ARENH mechanism will be rethought and amended in the short term, to adapt and cover situations similar to those that EDF and the alternative electricity suppliers have been facing over the past few months as a result of the spread of the COVID-19 and its economic consequences on the electricity market.
 RTE, L'impact de la crise sanitaire (COVID-19) sur le fonctionnement du système électrique, April 8, 2020, https://www.rte-france.com/fr/actualite/l-impact-de-la-crise-sanitaire-covid-19-sur-le-fonctionnement-du-systeme-electrique
 Article L. 336-1 of the Energy Code.
 By a ministerial order of May 17, 2011.
 Article L. 336-2 of the Energy Code and ministerial order of 28 April 2011.
 Article 62 of law no 2019-1147 of 8 November 2019 on energy and climate setting out the new cap applicable as from January 1, 2020. For the time being, the Government did not amend the 100 Twh cap.
 An adjustment mechanism consisting of an additional price is provided for by the law (Article L. 336-5 of the Energy Code) in case the volume bought by a supplier under the ARENH mechanism exceeds the volume of electricity supplied to its clients in France.
 Article L. 336-2 of the Energy Code.
 Article L. 336-3 of the Energy Code.
 Article L. 336-3 of the Energy Code.
 Article L. 336-5 of the Energy Code.
 Ministerial order of April 28, 2011. As of December 10, 2019, 86 suppliers had entered into framework agreements with EDF (please refer to https://www.cre.fr/media/Fichiers/marches/consulter-la-liste-des-fournisseurs).
 CRE, Evaluation of the ARENH mechanism between 2011 and 2017, January, 18 2018 – Please refer to https://www.cre.fr/Documents/Publications/Rapports-thematiques/Rapport-ARENH
 CRE, press release ARENH subscriptions for 2019, November 29, 2018 - https://www.cre.fr/Documents/Presse/Communiques-de-presse/Les-demandes-d-ARENH-pour-2019
 F. Levêque, France’s new Electricity Act: a barrier against the market and the European Union, December 2010, http://www.cerna.mines-paristech.fr/Donnees/data08/815-eprg_fl.pdf
 S. Ambec, C. Crampes, Regulated Access to Incumbent Nuclear Electricity; Toulouse School of Economics, January 15, 2019 (https://www.tse-fr.eu/regulated-access-incumbent-nuclear-electricity)
 Court of Auditors, Conclusions and recommendations further to the investigation conducted by the Court of Auditors on the implementation of the ARENH mechanism, December 22, 2017 - https://www.ccomptes.fr/fr/documents/41952
 Response from the ministers in charge of economy and energy to the recommendations of the Court of Auditors, March 14, 2018 – Please refer to https://www.ccomptes.fr/sites/default/files/2018-03/20180315-refere-S2017-3856-ARENH-rep-conjointe_0.pdf
 CRE, press release ARENH subscriptions for 2020, https://www.cre.fr/Documents/Presse/Communiques-de-presse/les-demandes-d-arenh-pour-2020
 M. Dégremont and E. Baker (France Strétagie), Impact of the COVID-19 crisis on the electricity system, April 20, 2020 - https://www.strategie.gouv.fr/sites/strategie.gouv.fr/files/atoms/files/fs-2020-point-de-vue-electricite-degremont-beeker-21-avril.pdf
 CRE, Deliberation of March 26, 2020 https://www.cre.fr/Documents/Deliberations/Communication/mesures-en-faveur-des-fournisseurs-prenant-en-compte-des-effets-de-la-crise-sanitaire-sur-les-marches-d-electricite-et-de-gaz-naturel
 S. Ambec, S. Crampes, Covid-19: infected electricity markets, Toulouse School of Economics, April 15, 2020 - please refer to https://www.tse-fr.eu/covid-19-infected-electricity-markets
 Decision no 439949 of April 17, 2020 - https://www.legifrance.gouv.fr/affichJuriAdmin.do?oldAction=rechJuriAdmin&idTexte=CETATEXT000041819172&fastReqId=532329136&fastPos=1
 Press articles have reported that Total Direct Energie, Gazel Energie acting through two of its affiliates, SAS Gazel Energie Generation and SAS Gazel Energie Solution, ekWateur and Alpiq have lodged interim claims before the Paris Commercial Court.
 Several press articles have reported that the Paris Commercial Court also rendered an interim order May 27, 2020, with respect to a claim lodged by Alpiq against EDF. However, we have not commented on this decision, which was not available to us at the date on which this article was drafted.
 The original French version reads as follows: "[l]a force majeure désigne un événement extérieur, irrésistible et imprévisible rendant impossible l'exécution des obligations des Parties dans des conditions économiques raisonnables".
 Interim order of the Paris Commercial Court of May 20, 2020, No. 2020016407.
 Interim orders of the Paris Commercial Court of May 26, 2020, No. 2020016517 and No. 2020016519.
 EDF, press release of June 2, 2020, https://www.edf.fr/groupe-edf/espaces-dedies/journalistes/tous-les-communiques-de-presse/edf-a-notifie-a-trois-fournisseurs-d-energie-la-resiliation-de-leur-contrat-arenh