October 11, 2016 / 1:32 PM / 10 months ago

UPDATE 1-France reaches agreement with EU over power capacity mechanism

(Adds quotes and comments from energy companies, background)

By Bate Felix

PARIS, Oct 11 (Reuters) - France has reached a technical agreement with European Union state aid regulators that could end a full investigation into its power capacity mechanism, a French official said on Tuesday.

A formal approval from European Union state aid regulators could mean that the French plan, aimed at securing power and avoiding blackouts during peak demand periods, could come into effect from January, energy ministry official Julien Tognola told a gas and electricity congress in Paris.

"The formal decision has not been taken by the Commission, but as it is the case with these kinds of issues, we always try to get a technical accord with EU competition authorities, which we have," Tognola said.

European Union state aid regulators opened a full investigation into the French plan over concerns that it could favour big energy companies like EDF and Engie and stifle new competition.

Tognola said France had held discussions with European Union officials over the past months and had made modifications in its capacity market plan.

"We are comfortable that with the modifications, the Commission will be able to give us its accord in the coming weeks," he said.

"That is why we have told stakeholders in the sector that, given this scenario, the capacity mechanism will enter into force from Jan. 1, 2017 as planned and we need to work towards that date," Tognola added.

Capacity mechanisms are used to fund electricity generation plants that may not be cost-effective but can guarantee supply during peak demand.

"The mechanism will give actors in the sector a real visibility on either maintaining capacity or investing in new capacities so as to be available during a peak winter demand period," Gilles le Mouillour, deputy head of regulatory affairs at Engie, said at the conference.

Xavier Caitucoli, Chief Executive Officer of alternative energy supplier Direct Energie said that although the plan is a positive first step, there were concerns about some aspects of the plan, notably the centralised tenders for new power production capacities.

"We should not necessarily trust the market to decide on security of power supply," he told reporters on the sidelines of the conference.

Caitucoli said the price signal of new production capacity tenders would be too short-term and too volatile and could prevent companies form investing in new capacities.

"We seem to be making the same mistake as in the carbon permits market. We are trusting the market with a decision that is political," he said. (Reporting by Bate Felix; Editing by Geert De Clercq)

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