Agoston Sikos is a second-year student studying History, Politics and Economics at UCL. He interned at the Special Analyses Department of the State Audit Office of Hungary and in M&A at MBH Bank.
Introduction
The economic downturn following the COVID-19 pandemic, growing tensions in the Asia-Pacific and the war in Ukraine have heightened fears of supply dependency on adversaries, pushing political entities away from cooperation and towards more protectionist policies of increased economic security.
How does the European Union, hit so hard by the energy crisis, cope with the trends in the international arena? One might think that such a crucial matter would generate a swift response from the governments of the Union. On the contrary, the EU was - again - paralysed by internal conflict this autumn. The tensions were serious, as they were between the two giant economies of the union, France and Germany, opposed on grounds of vital economic interests concerning the electricity market of the continent. France, following global trends and its long-term energy strategy, advocates for reliance on nuclear power, but Germany did not let it receive any new funds that it demanded up until the 17th of October. The robust economy of the European Union demands all of us, desiring to understand trends in the world economy, to inquire why there was chaos around Europe’s energy strategy in October, and what the final agreement entails for the EU’s future.
Two different approaches: The relationships of Germany and France to nuclear power.
On the 15th of April, anti-nuclear supporters gathered near Munich to celebrate the shutdown of Germany’s last nuclear power plants (Emsland, Isar II, and Neckarwestheim II). The largest economy of the European Union decided to completely free its energy production of nuclear power plants in 2011, following the Fukushima Daiichi disaster in Japan1. The decision was the culmination of three decades of political polemic, when the last important opponent of the closure of the nuclear power plants, Chancellor Merkel, demonstrated a complete turnaround on her previous beliefs in light of the catastrophe – the phasing out of nuclear power had been the agenda of the SPD and particularly of the Green Party historically.
The decoupling from Russian gas caused major fears among industrial specialists and researchers. They feared that a sudden stoppage in Russian energy imports would cause a collapse in output and a rise in unemployment in Germany. The GDP data released this year, however, shows that the effects of the cessation of imports (Germany was partially cut off Russian gas in June and completely in August 2022) turned out to be moderate, with the economy even managing to avoid a much-anticipated recession during the winter of 20224. At the same time, Germany’s main source of energy became the highly polluting coal5(which could only be replaced by the increased import of natural gas).
France could not be more different in its approach. France reacted to the 1973 oil crisis with the build-up of its fleet of nuclear power plants, acquiring its celebrated energy security. More than 70% of the nation’s energy comes from nuclear power due to this long-standing
energy policy. Not only that, but the second Macron government this year decided to abandon any plans regarding the closure of old plants, shortly after the decision in 2022 to construct six more and to consider the construction of eight more nuclear power plants. Mr Macron’s plan to build those six plants in addition to the decision to invest in the upkeep of existing ones is estimated to cost 52 billion euros. Why the costly undertaking? The existing nuclear power plant fleet not only allows France the luxury of not being dependent on energy imports but also makes it the world’s largest net exporter of electricity, gaining over three billion dollars per annum in revenues6. A remarkable achievement for a country that lacks all the natural resources needed to produce energy.
But what caused tensions in the EU this autumn?
The split over nuclear energy has become a major fault line between the two giants of the European Union. The crisis of this October was not the first one over the inclusion of nuclear power into EU reforms. The arguments on both sides contain a fair amount of ideology and environmental disagreements but are predominantly based on mutual uneasiness that the other side’s plan would put them into a disadvantageous position in the ever-changing European electricity markets relative to the other.
In Germany, the growing fears that strengthening nuclear energy may decelerate the augmentation of renewable energy sources form the centre of German politicians’ environmental arguments against nuclear power. This view, of course, raised many French eyebrows in Paris. One can vividly see the middle-level French bureaucrat asking his colleague in disbelief whether a country where the burning of coal accounted for one-third of all energy production in 20227is right to criticise a lack of commitment to renewable energy sources on France’s part. Ideology should not be overlooked either, the Green Party of Germany, one of the three political parties forming the coalition government of Mr. Scholz, was created on the very initiative to roll back nuclear power proliferation in the country, while in France nuclear power plants are considered to be a part of national pride.
More importantly, Germany and France have vital economic interests on the line. Particularly, they see each other's success as a disadvantage for their respected positions. Germany, notwithstanding the mild environmental criticism, always emphasises that France’s right to generate atomic energy should not be disputed. But for this same purpose, the usage of EU funds, created for the funding of renewable energy sources, is seen as highly problematic in Berlin. France has indeed been pushing to be able to use some of the EU assets that were created to subsidise renewable energy technologies to finance its investments in its nuclear energy sector. German leaders are also fearful that France would benefit more than its neighbouring countries if allowed to guarantee low power prices from its large nuclear output
The Deal
The lengthening debate, fuelled by these different industry policies, made smaller states - suffering from the halt of certain EU reforms as a consequence - impatient, and the European Union all but paralysed. In this environment, the leaders of the two major powers in the union were under considerable pressure to settle their differences. This they duly did on the 17th of October. As part of the reforms passed, France will be able to use so-called contracts for difference. These are funding structures that set a minimum price guarantee for the power provider and a ceiling above which the state can recover any revenue (that could be reverted back to consumers on the power bills, keeping a low price level).
Paris, however, for existing power plants, could not obtain the right to use the refunding mechanism when it is applied to industrial consumers. Not only that, but the French government also gave increased power to the European Commission to assess state aid benefits.
Conclusion
Ministers of the countries of the European Union debated the issue for months, while the great powers of China and the USA have long introduced subsidies for clean power. The debate shows the weakness of the European Union, that is the slow mechanism of
decision-making even when it is faced with a crucial issue. Nevertheless, the EU now has a plan, showcasing the ability of Europe to eventually balance opposite interests. In this specific case, the European Union will achieve a higher level of energy security and France will benefit from the advantages of the contracts for different funding structures, giving a further push to investment into the nuclear energy sector.