Renewables: Stable Near-Term, But Clouded Beyond
BMI View : We have maintained our 2014 forecasts for non-hydropower renewable energy generation in France as our assumptions remain relevant. However, an absence of both economic and energy sector reform has led us to slightly moderate our long-term forecasts. That said, we highlight that a number of nuclear reactors are scheduled to shut down by 2020, which poses an upside risk for the renewables sector. The results of the country's second round of offshore wind tenders in early-2014 could also affect our long-term forecasts.
We have maintained our 2014 forecasts for non-hydropower renewable energy generation in France at 4.8% this quarter, as our assumptions remain relevant. In particular, the outlook for the French economy remains poor in 2014, and President Francois Hollande has yet to effect any real changes to the country's energy policy.
The near-term economic outlook for France remains bleak, with our Country Risk team forecasting real GDP growth of just 0.5% for 2014. Economic activity in the country has ground to a halt as increasingly uncompetitive exports struggle to maintain market share. Meanwhile, the government's inability to rein in spending has supported household consumption, which is in turn stimulating imports and driving the public debt load higher ( see 'Labour Market Rigidities An Ongoing Problem', July 10 2013). This means that electricity consumption is unlikely to increase materially and that investors are unlikely to invest in new capacity in 2014. The lack of economic growth is also likely to affect tax revenues for the government, which could lead to a reduction in incentives for renewable energy given the country's sizeable public debt load.
|Lagging Behind The Pack|
|Manufacturing Purchasing Manufacturers Indices|
Meanwhile, President Francois Hollande remains unable to make any meaningful changes to the country's energy policy. In order to gain the support of the anti-nuclear Greens during his election campaign, Hollande had promised to reduce the share of nuclear energy in the country's generation mix (from around 75% at present to 50% by 2025) while raising the share of renewable energy. However, Hollande has failed to make any progress on this agenda since he won the elections in May 2012. He has yet to provide any details on how he plans to achieve reduce nuclear generation and increase renewable energy usage, and the incentive structure and regulatory environment for renewable energy remains relatively unchanged. While there are plans to enact energy transition laws in 2014, we believe that the parliamentary vote on these laws will only be conducted in late-2014, minimising any near-term impact on the sector.
We expect around 500MW of wind capacity to be added to the grid in 2014, which is about half of the average wind capacity installed in the last five years. This is because the incentives for wind energy have been greatly reduced over the past few years, while the turnaround time for wind projects has lengthened due to numerous regulatory proceedings. Our 2014 forecast for solar capacity additions of 500MW is also lower than the historical five-year average (of 800MW), which we attribute to high levels of uncertainty regarding the sector.
|Renewables Growth Stable, But Risks Ahead|
|France - Renewables Generation By Type (TWh)|
Long-Term: Moderation Due To Economic Concerns And Nuclear Policy
We have moderated our long-term forecasts for non-hydropower renewable energy generation in France due to the lack of economic and energy sector reforms. As highlighted above, France's exports have lost competitiveness due to a number of factors that include a highly expensive and rigid labour force. However, the Hollande administration remains unwilling to undertake the deep economic structural reform needed to restore competitiveness to the export base, which contrasts sharply with the progress made in this area by its regional peers such as Spain. This leads us to believe that France will experience a decade of tepid economic activity, which will act as a drag on investments into renewable energy, electricity consumption, and government incentives for the sector.
|Nuclear Shutdowns Generate Upside|
|France - Non-Hydro Renewables Generation By Type (TWh), 2013-2022|
Additionally, we note that the French government's muddled position on nuclear energy is creating a great deal of uncertainty, especially in the renewable energy sector ( see 'Irreconcilable Aims Generate Uncertainty Over Nuclear', November 12 2013). As we have mentioned, the Hollande administration is looking to introduce some energy transition laws in 2014, and these regulations are likely to be only voted on in the later part of 2014. One of the plans proposed by the Greens is a new levy on nuclear as well as a tax on fuel consumption which would raise funds needed to support renewables and energy efficiency measures. However, a government commissioned study found that the country would be vulnerable to price shocks should the government persist with its nuclear phase out, calling instead for a delay in the start of the nuclear phase-out programme to 2030. Additionally, we highlight that the taxes on nuclear energy and fuel consumption are unlikely to raise enough in revenues to support the major transition to renewable energy - with Hollande putting the projected cost of the transition at an estimated EUR20bn a year.
That said, we highlight that a number of nuclear reactors are scheduled to shut down by 2020. This poses an upside risk for the renewables sector. The majority of the country's reactors were built by French utility Electricite de France (EDF) in 1980 and 1990 with a planned life-span of 40 years. Among these reactors, more than a dozen are approaching the end of their theoretical life-spans. EDF's chairman and CEO Henri Proglio has said that the utility wants to extend the lives of its reactors for as long as six decades, but we highlight that the safety standards will be much higher for these reactors, which means not all of the reactors are guaranteed to get extensions. Although we are currently refraining from predicting the outcome for these reactors, we note that decommissioning would pose an upside risk for the renewable energy sector.
We note that the French government is due to release the results for the country's second round of offshore wind tenders in early-2014, and that the results of this tender could affect our long-term forecasts. The tender was first opened in March 2013, for offshore wind projects at two sites off the Atlantic coast (Le Treport in Normandy and between the d'Yeu and Noirmoutier islands off the Pays de la Loire region). A failure to award any of these projects could lead to a revision of our forecasts. We also highlight that the government is unlikely to achieve its ambitious 6GW offshore wind energy plan by the original dateline of 2020 as it failed to meet its 2012 capacity installation target.