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Cablegate: France: Energy Sector Update

VZCZCXRO3687
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #3336/01 2191626
ZNR UUUUU ZZH
R 071626Z AUG 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 9375
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/USDOE WASHDC
RUCNMEM/EU MEMBER STATES
RUEANFA/NRC WASHDC

UNCLAS SECTION 01 OF 03 PARIS 003336

SIPDIS

SENSITIVE
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STATE FOR EUR/WE; OES; NP; EB/ESC, AND EB/CBA
USDOC FOR 4212/MAC/EUR/OEURA
DOE FOR ROBERT PRICE PI-32 AND KP LAU NE-80

E.O. 12958: N/A
TAGS: ENRG EPET EIND EINV PREL PGOV FR
SUBJECT: FRANCE: ENERGY SECTOR UPDATE

NOT FOR INTERNET DISTRIBUTION

1. (U) This is the latest in a series of periodic updates on the
French energy sector. Feedback is welcome to help us make this
product as useful as possible for our inter-agency USG audience.

CONTENTS:

-- Areva wins 5 billion USD contract in China, but agreement
postponed (para. 2)
-- EDF partners with Constellation Energy in the U.S.
(para. 3)
-- Areva to provide civil reactor to Libya (para. 4)
-- France looking to sign nuclear cooperation deal with India (para.
5)
-- France to help the United Arab Emirates launch a nuclear power
program; begins discussions on nuclear cooperation with Algeria
(para. 6)
-- Total signs gas deal in Russia (para. 7)
-- Liberalization of the French energy market - modest results so
far (para. 8)
-- EU Commission opens new procedures against EDF, GDF, and
Electrabel (para.9)
-- France warns EU against energy unbundling (para. 10)
-- Draft amendment on regulated rates in the works (para. 11)

AREVA WINS 5 BILLION USD CONTRACT IN CHINA, BUT AGREEMENT POSTPONED

2. (U) On July 26, French nuclear giant Areva confirmed the
preliminary conclusion of an agreement with China Guangdong Nuclear
Power Corporation (CGNPC) to build two European Pressurized Reactors
(EPR), each with a 1,600 megawatt capacity. By far the biggest and
most important contract signed in Areva's history, the agreement was
also hailed in the press as a "consolation" for the loss in December
2006 of a sought-after contract for four reactors in China, valued
at 4.6 billion euros and given to Westinghouse. The conclusion of
the agreement, which should have taken place on July 31 in Beijing,
has been postponed for "technical" reasons. Although both Areva and
CGNPC have indicated that a formal letter of intent will be signed
soon, no date has been set. Under the terms of the agreement, Areva
would provide the reactors, the fuel, and the necessary services for
two third-generation reactors in Guangdong for 5 billion USD (3.6
billion euros). Areva is building the first version of its
third-generation EPR in Finland (to go into service in 2010-2011),
with a second under construction in Flamanville, Normandy (to become
operational in 2012). Last June, the French group filed for design
approval in the UK where EDF wants to build as many as four similar
reactors. The next stage is the United States.

EDF PARTNERS WITH CONSTELLATION ENERGY IN THE U.S.

3. (U) Pierre Gadonneix, CEO of Electricite de France, announced
July 12 that EDF had partnered with American firm Constellation
Energy to construct third-generation EPR reactors in the United
States. The American energy market is a "formidable growth
opportunity" for EDF, he said, particularly as the United States
looks to augment its productive capacity and explore renewable
sources of energy. EDF purchased a 9.9% stake in Constellation, and
agreed to invest 350 million USD initially, with the possibility of
another 275 million USD investment after the project is reviewed by
the Nuclear Regulatory Commission. Constellation submitted
environmental plans July 13 to the NRC for a single 1,600 megawatt
reactor in Calvert Cliffs, Maryland, which could cost close to 4
billion USD to complete. Gadonneix noted a degree of renewed
interest in nuclear energy in the United States, as private and
government actors seek to reduce dependency on oil and gas. He cited
EDF's "unparalleled experience and expertise" in the production of
nuclear energy as a way to calm public fears about the risks
associated with nuclear power.

AREVA TO PROVIDE CIVIL REACTOR TO LIBYA

4. (U) During his July 25 visit to Tripoli, French President
Nicholas Sarkozy signed a memorandum of understanding under which
French nuclear giant Areva would provide Libya with a civil reactor
to desalinate water. Areva confirmed that Libyan authorities had
approached them in 2006, and that negotiations for the project -
which could take years to complete - were still in the preliminary
stages. France's offer of nuclear cooperation with the
oil-exporting North African state has angered some German officials,
who see it as yet another example of Sarkozy's "go-it-alone"
approach to foreign policy. The French press reported that Deputy
Foreign Minister Gernot Erler had called the deal "politically
problematic" and noted that German interests were directly affected,
since Germany's Siemens group owns 34% of Areva's nuclear power

PARIS 00003336 002 OF 003


division.

FRANCE LOOKING TO SIGN NUCLEAR COOPERATION DEAL WITH INDIA

5. (U) France is working hard with India towards a nuclear energy
cooperation deal, following the agreement of a draft deal between
the United States and India. France has also offered to help the
United Arab Emirates launch a nuclear power program. Senior
advisers to the French president and the Indian prime minister met
in New Delhi on July 30 for a consultation session on the
Indo-French strategic partnership. According to a statement from
the French Embassy in New Delhi, the parties "stressed their common
endeavor to develop nuclear energy for peaceful purposes," and
"agreed to conclude expeditiously a bilateral cooperation agreement
thereof." Jean-David Levitte, diplomatic adviser to the French
president, invited India's Prime Minister Manmohan Singh to visit
France in 2008, and Singh has invited President Sarkozy to visit
India "at an early date."

FRANCE TO HELP THE UNITED ARAB EMIRATES LAUNCH A NUCLEAR POWER
PROGRAM; BEGINS DISCUSSIONS ON NUCLEAR COOPERATION WITH ALGERIA

6. (U) Talks on July 20 in Paris between Sarkozy and President of
the United Arab Emirates Shaikh Khalifa bin Zayed Al Nahyan
concluded with the two countries agreeing to put into effect a 1980
agreement to help the UAE launch its own nuclear power program. The
UAE is a member of the Gulf Cooperation Council, which has expressed
interest in developing a shared nuclear program for the region. In
a visit to Algiers a week earlier, designed to launch his initiative
for a Mediterranean regional union, Sarkozy also announced that
future sharing of civilian nuclear expertise between France and
Algeria had been a key topic of discussion.

TOTAL SIGNS GAS DEAL IN RUSSIA

7. (U) It took ten years to negotiate and a phone call between
Nicolas Sarkozy and Vladimir Putin, but the announcement finally
came on July 12: Total has been chosen over its two competitors,
ConocoPhillips and Norsk Hydro to develop the Shtokman natural gas
field, one of the largest in the world. The Shtokman gas deposit,
situated 340 miles offshore in the Russian Arctic, holds 3.7
trillion cubic meters of natural gas, enough to supply the European
Union for seven years. Total's offshore expertise proved an
effective bargaining chip, as the site is reported to be one of the
most technically challenging in the world. Initial estimates place
the cost of infrastructure development around 15 billion USD. The
field is expected to begin producing in 2013. Total will have a 25%
stake in the operating company, an additional 24% possibly going to
another foreign group, while Gazprom will control at least 51% of
the operating company and, significantly, 100% of the underlying
reserves. Total will have no say over where the gas produced is
sold. Total's CEO, Christophe de Margerie, noted that being
partnered with Gazprom could serve as protection from the "forced
nationalization" that Royal Dutch Shell and BP were recently hit
with in December and June. De Margerie also emphasized the
importance of the deal as a first step toward other projects in
Russia, where Total has not previously been very active.

LIBERALIZATION OF THE FRENCH ENERGY MARKET - MODEST RESULTS SO FAR

8. (U) On July 1 the French energy market, the exclusive domain of
Electricite de France and Gaz de France since 1946, opened to
competition. Eight new energy providers entered the market. As of
the end of July, however, only 309 French household customers have
switched to suppliers selling power at liberalized prices, according
to Patricia de Suzzoni, Director of Markets at the Energy Regulation
Commission (CRE). Speaking at a recent debate held by oil and
energy publisher BIP-Enerpresse, she said the number of calls to
CRE's information helpline had risen to 1,200 per day in the past
ten days from 1,200 per month previously. The fact customers cannot
switch back to regulated prices again is something that seems to
pose a problem to consumer associations, she explained. France's
leading consumer advocate group UFC-Que Choisir raised the
possibility that consumers risked significant increases in their
energy bills in leaving former electricity and gas monopolies EDF
and GDF. Complaints of skyrocketing prices from industrial energy
consumers, who have had a choice of provider since 2000 and have
seen their energy expenses increase by 75 percent in some cases,
fueled such fears. EDF's regulated rates are approximately 20 euros
below market price for a megawatt hour, the lowest in Europe, and
overall satisfaction with EDF and GDF remains high. Both providers
have reassured consumers that prices will not increase in the near
future; GDF promised not to raise its rates over "the next few
months," while EDF's contract with the French government stipulates
that its prices can only be raised to keep pace with inflation until

PARIS 00003336 003 OF 003


2010. Once consumers opt for one of the new electricity or gas
providers, they cannot return to EDF or GDF and their regulated
rates. Thus, consumers have a strong incentive to remain with the
historical providers for the time being.

FRANCE WARNS EU AGAINST ENERGY UNBUNDLING

9. (U) France and eight other European countries have written to
the EU Commission warning against a proposal to break-up utilities.
French Ecology, Sustainable Development and Planning Minister
Jean-Louis Borloo, whose responsibilities include energy issues,
drafted the letter, arguing that "the ownership unbundling between
network grids and commercial activities has not been successful."
He added that break-up brought no guarantee of low prices or
sufficient investment. Supported by Germany, Austria, Bulgaria,
Slovakia, Cyprus, Greece, Luxembourg and Latvia, the letter was
timed to sway the EU Commission in the final phase of drafting
legislation to implement a new energy and climate change strategy
agreed by EU leaders in March. Borloo's letter is designed to
counter a June letter by Britain, the Netherlands, Denmark and
Sweden urging the Commission to stick to the idea of the break-up of
the EU's energy giants. France is particularly concerned that EDF,
which controls both the production and supply networks, would be
seriously weakened by such a move, and prefers an approach which
would maintain the company intact, but regulate power distribution
grids from separately from other activities.

EU COMMISSION OPENS NEW PROCEDURES AGAINST EDF, GDF, AND ELECTRABEL

10. (U) The EU Commissioner for Competition announced July 27 that
Electricite de France and Electrabel, the Belgian subsidiary of
French-owned Suez, were under investigation for possible abuse of
their dominant positions in their respective markets. EDF and
Electrabel have for years signed "atypical" contracts with
industrial customers who consume the most energy, such as paper,
aluminum, and chemical manufacturers. In exchange for signing
long-term (15-20 years) agreements, the consumer receives a lower
price. The EU Commission believes such contracts block the entrance
of new providers and should therefore be reviewed. The Commission
also referenced "understandings" between EDF and Electrabel, but it
was unclear if this referred explicitly to collaboration between the
two firms to protect their market shares. EDF and Electrabel
declared themselves ready to cooperate with the investigation, which
could take a year or more. Similarly, the EU Commission opened
formal procedures against GDF and German gas company E.ON, suspected
of collaborating to protect their shares of the French and German
gas markets. Under the alleged agreement, the two companies
promised to keep out of each other's national markets, and may have
illegally fixed the division of Russian gas coming to southern
Germany and France via the only pipeline that transports Russian gas
to France.

DRAFT AMENDMENT ON REGULATED RATES IN THE WORKS

11. (U) French Senator Ladislas Ponitowski of the center-right UMP
Party has introduced a draft bill in late July, with the approval of
the government, to modify the current law on regulated energy
tariffs tying contracts to places of residence rather than to
individuals. Since the full liberalization of the French energy
market, residential customers have had the option of switching from
EDF and GDF's regulated rates to market-based prices. However,
under the existing law, the decision to abandon regulated rates is
tied to the place of residence, so that subsequent owners or
occupiers are forced to accept the market-based contract chosen by
the previous residents. The Senate hopes that these changes can be
implemented some time this fall.


Pekala

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