Labelling of Nuclear Power as ‘sustainable’ Under EU Taxonomy Reduces Transition Risk for France

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

The EU taxonomy is a critical pillar of an EU strategy to meet climate and energy targets for 2030 under the European Green Deal. This aims to establish a classification system for environmentally sustainable economic activities and scale up ‘green’ investment.

France’s stance on nuclear energy has come to the fore ahead of spring presidential elections as the climate transition becomes more prominent in the national public debate and a recent surge of energy prices raises a question of energy independence. We see clear divides among presidential candidates. Those on the left of the political spectrum advocate dropping nuclear energy while those on the right push for renewed investment into the sector.

France is the largest producer of nuclear power in the EU. Reliance on atomic power 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 critical for domestic power production and total energy supply. It accounted for 42% of overall energy supply and 66% of total electricity generation in year 2020, against 14% and 26% as regards the EU aggregate, respectively (see Figure 1).

Figure 1. Nuclear is a critical component of France’s power mix
% of total

More importantly, nuclear power is expected to play a crucial role in France’s energy transition. The National Low-Carbon Strategy (Stratégie Nationale Bas Carbone) relies on decarbonised electricity to help carbon-intensive sectors such as industry, transport or buildings reduce CO₂ emissions via electrification. France has legislated a reduction of a share of nuclear in aggregate electricity supply to 50% by year 2035, but nuclear ought to remain a prime energy source.

Even so, France will need to mobilise substantive investment in the nuclear sector to deliver on its climate commitments. Several reactors are due to close over the coming years and others require refurbishment to extend lifetimes, with an average age of the nuclear fleet of 35 years. President Emmanuel Macron announced in October 2021 that France will invest EUR 1bn in small modular reactors under France 2030 (investment plan). France allocated half of public energy R&D expenditure to nuclear in 2020.

Labelling of nuclear activities as ‘sustainable’ under the EU taxonomy would support France’s AA credit ratings. The move supports public finances, as the government could potentially fund nuclear spending via green bond issuance (OAT verte), benefitting from a growing ESG-investment community. It would also support strategic government-related entities in the nuclear industry such as EDF (83.5% owned by the French State) and nuclear-fuels company Orano (90%). Finally, nuclear’s inclusion in the taxonomy ultimately supports channelling of funding to large-scale investment and increasing funding flexibility as investors’ appetite for sustainable investment grows.

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Thomas Gillet is an Associate Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Thibault Vasse, Senior Analyst at Scope Ratings, contributed to writing this commentary.