Demystifying market clearing and price setting effects in low-carbon energy systems

Abstract The pursuit of climate stabilisation scenarios requires large-scale decarbonisation of power, heat, industry, and transport sectors. Cost-efficient decarbonisation strategies will primarily involve direct electrification of final energy demands, based on variable production from wind and solar PV as the primary source of renewable energy. Cross-sectoral integration is going to increase traditional electricity demands and is also expected to contribute with valuable flexibility in future electricity markets, particularly through bi- and multivalent technologies. However, the nature of market clearing and price formation effects in wholesale electricity markets with large amounts of renewable energy and significant cross-sectoral integration remains unknown. In this paper, we show and quantify that cross-sectoral demand bidding is going to be crucial for the price formation in future electricity markets. We found in a large-scale cross-sectoral capacity expansion and long-term cross-border transmission expansion study for the future integrated European system that bi- and multivalent cross-sectoral electricity consumers will be making market bids based on their valid opportunity costs. These price-setting technologies mainly include direct resistive and heat pump heating units. Unlike previous work, we can show and quantify that there will likely not be too many zero or even negative price situations due to excess renewable production in the system since the additional cross-sectoral consumers will, depending on their actual flexibility potential, use low-carbon electricity to supply final energy sector demands. Our results demonstrate how important it is to adequately capture cross-sectoral interactions and a variety of technology combinations in a high spatio-temporal solution when analysing future market clearing and electricity price formation effects in low-carbon energy systems. We anticipate our contribution to be a starting point for more sophisticated models incorporating detailed representations of cross-sectoral flexibility to investigate low-carbon energy markets further.