French market design in practice: Some lessons from the 2022 energy crisis

Between 2005 and 2021, France has generated more electricity from fossil-free resources (491 TWh/year on average) than its gross domestic consumption (481 TWh/year). Therefore, in terms of total surplus, the French electricity sector should have been barely hit, if at all, by the surge in fossil fuel prices during the 2022 energy crisis. In practice, however, the French government spent billions of euros in subsidies to electricity consumers, the incumbent utility – who operates the whole nuclear fleet – recorded its worst yearly financial result to date, and total electricity imports exceeded exports for the first time in more than 40 years. Although these outcomes can largely be attributed to bad luck, the extent to which they could have been mitigated through better market design and public policies is an open question. This article argues that existing policies, through their implied incentives to share and manage long-term risks, played a critical role in how France fared during the energy crisis. Consistently, reforming long-term risk-sharing mechanisms has emerged as the most pressing issue to address. Looking forward, however, updating short-term wholesale market design will likely prove increasingly important to better support a low-cost and reliable energy transition.