EDF / 2018 Reference document

PRESENTATION OF EDF GROUP Legislative and regulatory environment

the other public service costs – excluding the costs associated with the subsidy ■ mechanisms for renewable energies – (fuel poverty, tariff equalisation in areas not interconnected to metropolitan France, cogeneration, and the budget for the energy conciliator, etc.) are entered directly in the general budget under “Public Electricity Sector”; revenue from the domestic tax on the final consumption of electricity (TICPE), ■ which was renamed the “Contribution to Public Electricity Service” (CSPE), is directly affected to the general budget. The CSPE is collected directly from final consumers of electricity in the form of an additional levy on the electricity sale price or directly from electricity producers that produce electricity for their own uses. Before 1 January 2017 it had been used to fund renewable energy and cogeneration plants, offset cost overruns in island territories and subsidise welfare policies. The amount of the CSPE was set at €22.50/MWh as from 1 January 2016. This amount has been maintained for 2017, 2018 and 2019. As an exception, for electro-intensive and hyper-electro-intensive undertakings and distribution companies, reduced tariffs of between €0.50/MWh and €12/MWh have been defined. The Decree no. 2016-158 of 18 February 2016 specifies the rules for determining the costs that can be attributed to public service energy missions, the procedure for determining the amount of the costs to be compensated for each operator, and the transactions for paying the compensations to the operators who bear the expenses. Each year, the CRE records the amount of the costs that can be attributed, in respect of the previous year, to public service energy missions that are the responsibility of the operators and assesses, for the following year, the provisional amount of the same costs, and updates its cost forecast for the current year. Doing so, it distinguishes between the costs that are allocated to the “energy transition” special purpose account and those financed directly by the general budget. Each year, before 15 July, the CRE sends the Minister for Energy its assessment of the amount of these costs. The massive expansion of facilities that generate electricity using renewable energy sources (mainly wind power and photovoltaic facilities) and that benefit from the purchase obligation, for several years, has led to a significant increase in the costs to be compensated. Yet, since 2007, the amount of the CSPE that is actually applied to consumers has not made it possible to cover these costs, thus leading to an offsetting shortfall, for which EDF alone pays and that adversely impacts the group’s indebtedness. It therefore became necessary to design a new balanced mechanism (i.e. that avoids a new structural deficit being created), the financing of which is not based exclusively on electricity consumers alone (electricity is by far the least carbon-heavy energy and yet an imbalanced tax situation penalises its ability to compete with other energy forms, which is in contradiction with the CO 2 emissions reduction targets of the “Energy Transition” Law). Accordingly, since 1 January 2017 a share of TICPE revenue has been allocated to the “Energy Transition” CAS while the CSPE is allocated directly and solely to the general budget. EDF and the public authorities have reached an agreement for the repayment of the debt formed by the offset deficit as it stands on 31 December 2015 i.e. €5,779.8 million. Under the new mechanism that has been in force since 1 January 2016, this debt shall be paid off by 31 December 2020, according to a progressive repayment schedule that was defined by an Order of 13 May 2016, which was amended on 2 December 2016. On 22 December 2016, EDF sold part (26.40%) of this debt to a pool of investors comprised of a bank and a dedicated Special Purpose Entity (SPE). The proceeds of this sale without recourse totalled €1.542 billion. The debt sold includes a component which is not classified as dedicated assets. The sale of this component has led to an improvement of the Net Indebtedness of approximately €645 million. The remainder corresponds to the portion of the debt that was allocated to Dedicated Assets. It will be reinvested in these assets. ompensation for additional distribution costs The purpose of the Electricity Equalisation Fund (FPE), the accounting management of which is entrusted to EDF under Article L. 121-29 of the French Energy Code, is to distribute the charges incurred as a result of public service missions assigned for managing the electricity distribution networks among the operators concerned, in

particular those linked to the specificities of the networks operated and that will not be covered by the portion relating to the use of those networks in the regulated tariffs or by the tariffs for using the public electricity distribution networks. The costs linked to involvement in the development of areas with particular geographical, economic or social difficulties, as defined by Article 42 of Law no. 95–115 of 4 February 1995, are also concerned. Note 4 to the consolidated financial statements at 31 December 2018 (section 6.1) describes the financial impact on the Group of the law's application. Capacity guarantees Articles L. 335-1 et seq. of the French Energy Code, which are taken from the NOME Act (New Organisation of the Electricity Market – Nouvelle Organisation du Marché de l’Électricité), obligate each electricity supplier to contribute to the security of electricity supply in continental metropolitan France, in light of its customers’ power and energy consumption patterns. Each supplier must therefore provide annually, under penalty of an administrative sanction, an amount of capacity guarantees according to its customers’ consumption at peak periods. Suppliers will obtain these capacity guarantees from generation or load operators, which must first have their capacities certified by the public distribution network manager. The aims of this mechanism are: to make it possible to maintain or develop generation or load shedding capacities ■ that ensure the level of security of supply set by the public authorities; to improve the remuneration of these capacities; ■ to share the expense of this security of supply among all suppliers. ■ The “capacity mechanism rules” proposed by RTE were approved by a ministerial order of 22 January 2015 after consulting the CRE. Following the publication of Decree no 2018-997 of 15 November 2018 on the required capacity mechanism in the electricity sector, RTE sought consultation on a new draft set of rules. The Law of 17 August 2015 on Energy Transition for Green Growth has adapted the capacity mechanism to small players allowing LDCs to transfer their capacity obligations, no longer just to other LDCs but “to any other supplier” and allowing electricity suppliers to transfer their capacity obligations to a final consumer for its consumption or to a public network operator for its losses (Article L. 335-5 of the French Energy Code). Moreover, Article L. 335-3 of the French Energy Code introduced the possibility for all capacity operators to transfer to a third party their liability for discrepancies between effective capacity and certified capacity, and the payment of the penalties in respect of said discrepancies. On 13 November 2015, the European Commission opened an in-depth investigation in light of European rules on State aids, with respect to the planned French capacity mechanism. On 8 November 2016, the European Commission approved French plans for a capacity mechanism. During the investigation, France agreed to amend the mechanism as follows: introduction of long-term contracts (7 years) for new capacities, taking into account foreign capacities and measures to prevent any manipulation of the market. Revisions made for the improvement of market transparency and surveillance led to the publication of the Order of 29 November 2016 amended by the Order of 12 October 2018. This made it possible for the mechanism to enter into force on 1 January 2017. Over-the-counter transactions remain possible. The implementation of the commitments concerning the opening of the mechanism to foreign capacity providers and long-term contracts requires a revision of the 2012 Decree, adopted in 2012 by the Council of State after reviewing the opinions delivered by the Higher Energy Council, the National Council for Standards Assessment, the Energy Regulation Commission and the Competition Authority. Decree no. 2018-997 of 15 November 2018 on the required capacity mechanism in the electricity sector provides for the explicit inclusion of some cross-border contributions to France's security of supply of electricity as well as the setting up of a multi-year contractual system for new capacity.

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EDF I Reference Document 2018