Price Formation in a Highly-Renewable, Sector-Coupled Energy System

2025-09-12

AI Summary

As high shares of renewable energy and cross-sectoral electrification advance, electricity wholesale price formation is shifting from fossil-fuel marginal cost dominance toward opportunity-cost-based valuation of flexibility resources—including storage and demand response. Method: This paper proposes a novel dual-variable-mapping approach to model supply and demand bids, enabling the first hourly-resolution full supply-demand curve representation. Integrated within the PyPSA-DE framework, it combines high-resolution optimization, myopic forecasting, and five-year time-stepped simulation to analyze German electricity prices across a full decarbonization pathway (2020–2045). Contribution/Results: In a fully decarbonized system, 75% of hours exhibit non-zero prices; while average price profiles become smoother, volatility intensifies. Cross-sectoral demand response and multi-scale energy storage are identified as critical mechanisms for mitigating extreme price spikes and ensuring economically efficient market clearing. The methodology quantifies the stabilizing role of flexibility resources in wholesale price formation under deep decarbonization.

Technology Category

• Game Theory and Economic Paradigms: Auctions and Market-Based Systems
• Search and Optimization: Mixed Discrete/Continuous Search
• Planning, Routing, and Scheduling: Optimization of Spatio-temporal Systems

Application Category

• Economics, Online Markets and Human Computation: The sharing economy
• Systems and Infrastructure for Web, Mobile and WoT: Energy management for devices in mobile Web and WoT environments
• Graph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphs

Abstract

As variable renewable energy increases and more demand is electrified, we expect price formation in wholesale electricity markets to transition from being dominated by fossil fuel generators to being dominated by the opportunity costs of storage and demand management. In order to analyse this transition, we introduce a new method to investigate price formation based on a mapping from the dual variables of the energy system optimisation problem to the bids and asks of electricity suppliers and consumers. This allows us to build the full supply and demand curves in each hour. We use this method to analyse price formation in a sector-coupled, climate-neutral energy system model for Germany, PyPSA-DE, with high temporal resolution and myopic foresight in 5-year steps from 2020 until full decarbonisation in 2045. We find a clear transition from distinct price levels, corresponding to fossil fuels, to a smoother price curve set by variable renewable energy sources, batteries and electrolysis. Despite higher price volatility, the fully decarbonised system clears with non-zero prices in 75% of all hours. Our results suggest that flexibility and cross-sectoral demand bidding play a vital role in stabilising electricity prices in a climate-neutral future. These findings are highly relevant for guiding investment decisions and informing policy, particularly in support of dynamic pricing, the expansion of energy storage across multiple timescales, and the coordinated development of renewable and flexibility technologies.

Problem

• Analyzing price formation transition from fossil fuels to renewables and storage
• Developing method to map dual variables to supply-demand curves
• Investigating flexibility and cross-sectoral demand for price stabilization

Innovation

• Dual variable mapping for price formation analysis
• Sector-coupled energy model with high resolution
• Flexibility and cross-sectoral demand stabilize prices