Labeling nuclear energy as “sustainable” according to EU taxonomy reduces transition risk for France


The European Commission has launched a consultation on a draft text for the labeling of nuclear as a ‘green’ energy source within the framework of the EU taxonomy for environmentally sustainable activities. If the proposal were approved by the European Parliament and the Council, it would have positive implications for France’s credit given the importance of nuclear power in the national energy mix, the climate plan and energy independence.

The EU taxonomy is a key pillar of an EU strategy to achieve the 2030 climate and energy targets under the European Green Deal. The objective is to establish a classification system for ecologically sustainable economic activities and to increase “green” investments.

France’s stance on nuclear power has taken hold ahead of the spring presidential elections as climate transition becomes more prominent in the national public debate and a recent spike in energy prices raises the question of the energy independence. We see clear divisions between the presidential candidates. Those on the left of the political spectrum advocate the abandonment of nuclear energy while those on the right push for renewed investment in the sector.

France is the largest producer of nuclear energy in the EU. Dependence on atomic energy explains why France also has the lowest per capita emissions of advanced economies according to the International Energy Agency (IEA). Nuclear power generation derived from France’s 56 reactors is essential to national electricity production and total energy supply. It accounted for 42% of global energy supply and 66% of total electricity production in 2020, compared to 14% and 26% respectively for the EU as a whole (see Figure 1).

Figure 1. Nuclear is an essential component of the French energy mix
% of total

Source: IEA, Scope Ratings GmbH

More importantly, nuclear should play a crucial role in France’s energy transition. The National Low-Carbon Strategy (National Low Carbon Strategy) relies on decarbonized electricity to help carbon-intensive sectors such as industry, transport or buildings to reduce their CO emissions2 emissions via electrification. France has legislated a reduction in nuclear’s share of global electricity supply to 50% by 2035, but nuclear must remain a primary source of energy.

Nevertheless, France will have to mobilize substantial investments in the nuclear sector to meet its climate commitments. Several reactors are due to close in the coming years and others require renovations to extend their lifespan, with an average age of the nuclear fleet of 35 years. President Emmanuel Macron announced in October 2021 that France would invest €1 billion in small modular reactors as part of France 2030 (investment plan). France devoted half of public expenditure on energy R&D to nuclear in 2020.

Labeling nuclear activities as “sustainable” according to the EU taxonomy would support France’s AA credit ratings. This decision supports public finances, as the government could potentially finance nuclear expenditure through the issuance of green bonds (green oats), benefiting from a growing ESG investment community. It would also support strategic public entities in the nuclear industry such as EDF (83.5% owned by the French state) and the nuclear fuel company Orano (90%). Finally, including nuclear in the taxonomy ultimately supports channeling finance into large-scale investments and increasing funding flexibility as investor appetite for sustainable investments grows.

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Thomas Gillet is Associate Director of Sovereign and Public Sector Ratings at Scope Ratings GmbH. Thibault VasseSenior Analyst at Scope Ratings, contributed to this commentary.

This article originally appeared on FX Empire

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