Second-best electricity pricing in France: Effectiveness of existing rates in evolving power markets

Abstract

The adoption of time-varying pricing in the French electricity market has been historically low despite their availability to consumers well before the deployment of smart metering. However, as the share of variable renewable electricity increases and carbon prices grow, the demand-side response will become increasingly important to achieve efficiency gains. Relying on the historical hourly consumption of French electricity consumers and multiple prospective weather years, we study the gain allowed by the broader adoption of time-varying electricity retail rates in low-carbon power systems. We develop a four-stage methodology to assess the efficiency and stability of the electricity supply cost component of the electricity bill in France for historical and prospective years. Our analysis demonstrates that peak pricing schemes have increasing interest in the context of further deployment of renewable capacity, capturing 25% to 50% of the welfare gain reached by real-time pricing schemes. The corresponding deadweight loss of peak pricing schemes represents 0.4 to 1 bn EUR per year in 2030 compared to real-time prices (RTP) schemes. Conversely, deadweight loss of current time-of-use (ToU) rates represents 1 to 1.2 bn EUR per year in 2025 and increases over time. The current design of TOU rates does not provide adequate incentives in future power systems. Besides the tariff efficiency, the results underlined an increasing price difference between on-peak and off-peak rates. This questions the social acceptance of time-varying retail rates for consumers unable to hedge against peak prices. By analysing the effectiveness and limitations of time-varying rates, our findings underline the importance and value of price-based DR in future power systems in general. Our results highlight the need to revise the end-user tariff design in the French power system, notably with regard to the conveyed price signals.