A Franco-German Grand Bargain on Energy Policy
European energy ministers will meet on October 17 to try and make progress on critical energy legislation. France and Germany are deeply skeptical about each other’s energy strategy. But finding a compromise is now urgently required to finally unlock the EU-wide energy transition.
France and Germany are increasingly at odds over energy policy. Particular bones of contention are the composition of the electricity mix and its impact on their respective industrial competitiveness. This is not only fueling profound distrust and contaminating a number of other critically important European issues (EU enlargement and institutional reform, defense cooperation, industrial policy, fiscal rules), but also slowing down Europe’s energy transition and the continent’s decarbonization efforts. Both countries are increasingly committed to an energy strategy that is viewed by the other as doomed to fail. What’s more, both strategies are increasingly rooted in national mythologies (about nuclear and renewables), which makes compromise harder.
France is doubling down on nuclear energy when it has no clear plan to extend the life of its current set of nuclear power plants. Also, it has not yet proven that it can build and run the new generation European Pressurized Reactors (EPRs) at a controllable cost. In contrast, Germany has been closing down fully-functioning nuclear power plants and is pressing ahead with its ambitious renewables expansion while firing coal and natural gas power stations.
On one hand, France considers this choice as an absolute folly that undermines the European Union’s emissions reductions commitments. On the other hand, Germany has experienced first-hand the failure of the French nuclear strategy over the summer of 2022, when half of France’s nuclear power plants went out of service at the worst possible moment for Europe. Berlin believes that Paris’ nuclear push is not only economically insane, but also a potential risk to Europe’s energy security and stability.
The reality is that both countries are probably right to be skeptical about each other’s plans. And yet, both have to overcome this skepticism and cooperate to reach a truce.
For the first time, State Secretary Sven Giegold, who is in charge of the portfolio at Robert Habeck’s Economy and Climate Ministry, has called for a “grand bargain.” It requires a common strategy that meets the following objectives: achieve the lowest and least volatile energy prices for all to preserve the economic level playing field across the EU; reduce security of supply risks for all to support Europe’s competitiveness vis-a-vis the rest of the world; and finally accelerate decarbonization.
These three objectives could be achieved by building on the following four pillars: (i) the reform of the electricity market design to uphold the role of the price signal, (ii) the expansion of electricity interconnections to deepen the electricity market and develop smarter grids, (iii) the development of a truly common hydrogen strategy and the development of the necessary infrastructures to accelerate the transition away from natural gas; and (iv) the safeguarding of technological neutrality for electricity production and energy distribution to enable the development and extension of nuclear power for as long as necessary.
Four Steps for a Grand Bargain
To achieve this, and thus a Franco-German grand bargain on energy policy, Paris and Berlin will have to take the following four steps:
First, France and Germany need to agree to support the new electricity market design proposed by the European Commission. This means France accepting an end to its current subsidizing of existing nuclear power production by way of the so-called ARENH price or contracts for difference. Maintaining such subsidies would be an important distortion of the European electricity market and would provide inadequate incentives for production, distribution, and interconnections in France.
Germany, for its part, needs to abandon its plan for an energy price brake for energy-intensive industries. While more targeted, this would pose similar challenges and would raise profound questions as far as a level playing field across Europe is concerned. With these concessions, the electricity market design reform could be agreed based largely on marginal pricing and merit order would allow the formation of long-term contracts of similar design and scope across the EU that would essentially lead to the differential pricing of base load and intermittent electricity sources, but without a profoundly different market structure.
Second, the electricity interconnectors across Europe need to be upgraded to allow greater transfer for a pan-European grid that will have to deal with more intermittence. This means that German, France, and Spain in particular must commit to expanding interconnections as well as to expanding considerably their investments into the national grid. This could be facilitated if both France and Germany committed to use some of their unused Resilience and Recovery Facility/RepowerEU funding to expand interconnectors to deepen the integration of their electricity markets. Better even, they would agree to establish a new facility specifically designed to invest in Europe’s energy transition and infrastructures. These investments are required to build the smart grid of the future that Europe needs. This will not happen if the balkanization of energy policy becomes more entrenched.
Third, while electricity is clearly the beating heart of Europe’s energy future, hydrogen will certainly play an important role soon for energy intensive sectors and possibly for transport. This requires connecting North Africa to Europe and Southern Europe to Northern and Central Europe. Given France and Germany’s future electricity generation capacity, they are both unlikely to turn into net hydrogen exporters for a long time. They should therefore cooperate on importing as much hydrogen as possible at the lowest possible cost and agree on prioritization for the use of hydrogen to the sectors where it is most needed.
The BAR-MAR undersea pipeline connecting Barcelona to Marseille that France has committed to develop with Spain should be extended to a Franco-German commitment to build the extension pipelines through to Germany and Northern Europe. The current perception that France will obstruct hydrogen interconnection because it doesn’t want to be a transit country needs to be addressed. Also, Germany needs to drop its insistence on being able to discriminate against non-green hydrogen to enable infrastructure investments now and to lay the foundation for an integrated hydrogen market in Europe. In all likelihood, lowest cost hydrogen production will dominate and eliminate the need for discrimination between green, gray, and pink hydrogen.
Fourth, France and Germany should commit to adopting a strictly technology neutral approach to their transition. France will not force Germany to abandon natural gas and Germany will not force France to abandon nuclear. This means that financing for nuclear energy development and production should be allowed under the European taxonomy and European funding instruments. This does not equate considering nuclear power installation as equivalent to renewables under the Renewable Energy Directive, and this should not lead to an increase in funding uspport to fossil fuel industries. But it means no discrimination against nuclear-generated hydrogen and no undermining of the financing and build-up of nuclear capacity in EU member states that chose to do so. This technology-neutral approach is also consistent with providing adequate financing for the decommissioning of nuclear power plants and the treatment of nuclear waste, which Germany will also need.
Russia’s attack on Ukraine has caused an energy crisis which has in effect, led to a renationalization of energy policy. A Franco-German energy compromise is not only urgently needed to finalize the adoption of some key pieces of European legislation, but also to unleash Europe’s energy transition and decarbonization on the basis of a genuinely pan-European energy transition strategy.
Shahin Vallée is senior research fellow at the German Council on Foreign Relations’ (DGAP) Center for Geopolitics, Geoeconomics, and Technology.