'TSE economists contribute to EDF's expertise at the frontier of current research'

Interview with Charles Weymuller
Chief economist, EDF Group

EDF Group is a multinational electric utility company whose raison d’être is to build a net zero energy future with electricity and innovative solutions and services, to help save the planet and drive wellbeing and economic development. TSE and EDF have built together a long-standing partnership. Under the egis of the TSE Energy and Climate Center, this partnership covers three main topics: investment and production, pricing and distribution, competition, and strategy. In addition to supporting research projects, EDF is a member of the TSE Partners Club.
EDF’s Chief economist Charles Weymuller has taken the time to discuss their support to TSE and the challenges the electricity sector faces. Before joining EDF, Charles worked for 5 years as a macroeconomic and trade policy advisor in the offices of the French President and the Prime Minister.

What are the key concerns in the European electricity sector? 

The worldwide energy sector is engaged in a massive transition to enable our society to reach carbon neutrality as soon as possible. As part of this global effort, the electricity sector has a unique responsibility, because electricity is the pivotal technology to succeed in this transition: on the one hand its production can be decarbonized entirely, and on the other hand most energy uses can rely on electricity. 

To harness the indispensable potential of electricity, we face several challenges. First, significant amounts of investment are needed to switch to decarbonized technologies, both upstream in electricity production and downstream in electricity uses, and some of these decarbonized technologies are not yet mature hence call for intensified innovation. Second, the energy transition requires countless changes in behaviors all over our society, in the way we produce and work, the way we live in our homes and in our daily routines, the way we travel, the way we eat, etc. All these challenges converge towards the need to re-think and revamp the way the electricity sector is organized. 

As far as Europe is concerned, despite not being a commodities-rich region, we can rely on key assets to achieve an orderly transition: we master the key decarbonized power technologies (nuclear and renewable energies) and we benefit from a well-integrated single market for short-term dispatching of electricity, which efficiently allocates, hour after hour, the means of production and the power consumption across Europe. But we need to seriously complement the current market design, by relying more on long-term signals, which are essential to trigger the necessary investments, both in electricity production and in electricity uses. Thus, we need more long-term planning and more long-term contracting. This is a significant paradigm change for the European electricity sector.

How can economists help to tackle the energy transition? 

The challenges faced by the electricity sector we just mentioned intrinsically, are of economic nature. To help address them, economists have an important responsibility, which is to provide a framework to think about the issues, to weigh the different options, to make explicit the trade-offs and to quantify the impacts, with the view to fostering an objective public debate and helping all stakeholders take informed and scienced-based decisions.

Economics for the electricity sector used to be a some-how “standalone” field in industrial organization, because of its technicalities and the specificities of the power technology, but it now increasingly mobilizes expertise from various economic fields. Indeed, because the energy sector plays a unique role in environmental issues, it has first-order macroeconomic implications, for the economy as a whole and for our environment. Hence, we must jointly analyze the microeconomics and the macroeconomics of the energy sector: On the micro side, how the price of electricity is formed, how the right incentives on energy actors can be set? On the macro side, what are the effects of energy prices and energy availability on industry competitiveness, on the disposable income of households? There are non-trivial trade-offs, for instance between the massive investment needs in the electricity sector and the objectives to keep energy prices low. To strike the right balance, and to design optimal policies and strategies, these trade-offs must be characterized and quantified by economists. The analysis blends not only micro and macro, but also short-term issues (how to ensure security of supply when electricity is hard to store?) with long-term issues (what is the optimal energy mix in 2050?), theoretical questions (how to apply mechanism design to characterize optimal contracts and market organizations?) with empirical ones (what is the elasticity of energy consumers, and how they react to price and non-price signals?).

A very revealing illustration of this diversity of expertise is the ongoing discussion on the European electricity market design. The current market design relies on a perfect market reference, as it builds supply and demand curves to obtain a market clearing price at each hour. This works very well for the short-terms goals, namely, how to match supply and demand at each hour efficiently, despite an extreme volatility in the underlying fundamentals (typically, both demand and supply of electricity are increasingly dependent on weather). But this market design has worrisome shortcomings as far as the long-term goals are concerned: the resulting extreme volatility in prices of energy wholesale markets deters the much-needed investments in the energy transition,  and this instability has other harmful macroeconomic consequences. A sound economic approach is to identify the friction: where the markets are incomplete, where the competition is incomplete, where the information is asymmetric, and then think about a new market design that mitigates these frictions, without spoiling what works well in the short-term dispatching of electricity. We have now a robust conviction that long-term contracts are powerful tools to mitigate such frictions, as they give better visibility on long-term prices faced by producers and by consumers, and they can be tailored to fit the precise needs of a given production or storage technology, or of a given electricity consumer. Long-term contracts also weaken collusion on short-term markets.

Could you tell us more about your role as Chief economist at EDF Group?

The role of the chief economist is two-sided. First, internally, my responsibility is to validate the key economic assumptions EDF Group relies on for its strategic choices, such as investments projects. This includes the construction of consistent scenarios for the long-term energy mix, in every country of interest for EDF strategy. To do so, we can rely on a very strong collective expertise within EDF, both on the technological dimensions (e.g. on production, storage and consumption of energy), and on the economic as well as societal dimensions. Second, externally, my role is to actively engage into the collective discussion on current economic issues that relate to the energy sector. Indeed, it is essential for EDF to participate in the academic and policy debates, through articles, experiments, analyses, practice-sharing, so that public policies and energy actors can build upon the unique expertise and experience EDF has on energy issues, for the general interest. I contribute to this endeavor, together with my expert colleagues.

EDF and TSE have been partners for almost 30 years. From your viewpoint, what have been the main benefits from this partnership so far for your company?

The TSE-EDF partnership was set up in the very early days of the “Toulousian project”, l’Institut d’Economie Industrielle (IDEI) that pre-dated TSE, and it has been a pillar of TSE expertise in Industrial Organization. It has been 30 years of extremely fruitful exchanges between, on the one hand cutting-edge academic economists led by Jean-Jacques Laffont, Jean Tirole and now Christian Gollier, and on the other hand, EDF experts and practitioners that are on the front-line of the energy sector. EDF has brought to the partnership concrete and critical issues to work on, with our insights based on our blend of technico-economic expertise. Reciprocally, TSE economists have crucially contributed to maintain EDF expertise at the frontier of current research, by applying powerful IO frameworks to the electricity sector and more generally by bringing a robust economic approach, both theoretical and empirical. Together, the TSE-EDF partnership has been able to solve essential issues for the electricity sector, following the pace of the eventful reorganizations of the sector. Among numerous achievements, I would mention the contract design for emerging power assets such as renewables, the market coupling between European bidding zones, and the optimal tariffication for electricity faced by final consumers. More broadly, our joint work on the electricity sector and its regulation feeds in the ongoing policy discussions on these issues.

Which research agenda at TSE are you most looking forward to seeing the results of?

Based on the key concerns for the energy transitions I touched upon earlier, I would emphasize that a lot of dimensions in TSE current research are very relevant for our sector. First, IO issues are still vivid: the market design discussion raises a lot of questions regarding optimal contract design, for instance how to balance the preservation of short-term incentives to optimize assets and the need to stabilize long-term price signals? Second, a specific feature in the evolution of the energy mix is the increasing penetration of renewables, whose energy production is intermittent. This creates enhanced flexibility needs, and the whole electric system needs to adjust to this. There are several open questions arising from this emerging trend, notably the management of flexibility assets to face increased volatility both in the supply and in the demand. Third, TSE also has a unique expertise in macroeconomics, and its ongoing research on the management of risk, discount rates, the way to complete markets, are especially relevant for the electricity sector, which is not only very capital intensive, but also highly interdependent with the macroeconomy. 

Many EDF researchers have shared their knowledge with TSE students over the years.  Why does EDF engage its teams in training programs such as the one offered at TSE?

It is also extremely fruitful to exchange with TSE students, not only because they quite often raise the right questions, but also because they are invested in current research. EDF experts are thrilled to share their research, especially when it has a collective outreach, and an audience made of TSE students is a very valuable one to engage in a deep and constructive discussion on issues of common interest. All the parties engaged in such discussions take away useful insights for their future work. From EDF’s standpoint, engaging in training programs for TSE students is an intrinsic component of the TSE-EDF partnership, which is based on a shared conviction that academic economics has a key role to play in the analysis of real-world problems. 

You worked for the French Government before joining EDF Group. How would you compare these experiences?

In both cases, what drives the action above all are long-term objectives and the general interest. When I worked for the French Government, I had the chance to contribute to the design of policy reforms, in various fields such as labor and social policies, industry, competition, public finance. Each time, a sound economic analysis was instrumental to frame fair and efficient policies. Often there are trade-offs, and I believe economists have an important role to play in making these trade-offs explicit, and in presenting options in an objective manner, based on relevant and quantified indicators. For my work at EDF, I keep the same mindset and I strive to bring relevant and objective economic insights, trying to weigh the various dimensions of an issue, to help the Group make sound strategic decisions. My current work is now entirely focused on energy, which I am convinced plays a key role for the general interest. Energy truly is a common good, for at least two reasons: first, you cannot prevent anyone from accessing energy, as it is essential for the society to just live, second, the production of energy has a direct effect on our planet. Energy is the symptomatic good for which our society needs to position itself between a floor and a ceiling, what is eloquently sometimes called the donut economy. EDF has an important role to play in this challenge, as a major utility company, dedicated to public service. It embodies how a company can serve the general interest, through its corporate actions, from innovation, investment, to day-to-day production and service provision.

After graduating from Polytechnique, you completed your PhD in Economics at Harvard University. Does this have an impact on the way you approach issues in your job?  

Indeed, it is very useful to have been trained as a PhD economist in my current job. The hard knowledge you learn during a PhD in Economics can be mobilized at any time, sometimes it consists in basic insights from microeconomics, some other time it can be much more conceptual issues, e.g. relative to the efficiency of equilibria in incomplete market environments. Counter-intuitively, such kind of theoretical insights can prove very helpful even in operational discussions, because it frames the issues and it helps clarifying the mechanisms at play. Besides, what you also learn during a PhD, or during any “training by research”, are the soft skills of the researcher, which are also very helpful in non-academic positions: the perseverance facing complex and open issues, a critical mind facing any opinion, and a search for consistency facing apparent contradictions.

Interview published in TSE Reflect, May 2023