Price formation and intersectoral distributional effects in a fully decarbonised European electricity market

Future power supply will be dominated by solar and wind energy with near zero variable costs. Hence, wholesale market prices could frequently drop near zero. We use a sector-coupled power system model to optimise scenarios of a fully decarbonised European electricity market with a high penetration of variable renewables. Resulting electricity prices exceed near zero levels throughout most hours of the year as they are predominantly determined by the opportunity costs of cross-sectoral demand, particularly electrolysers. Consequently, even in markets with a high penetration of variable renewables, electricity prices continue to be driven by fuel costs, as they determine the opportunity costs of a price-setting demand. We find market actors in different sectors to be heterogeneously exposed to associated price risks. Price-responsive electricity demand can mitigate cost increases, while investors in variable renewables and inflexible electricity consumers are similarly exposed to revenue and cost risks. Thus, they could mutually benefit from risk-mitigating instruments. Conversely, our results indicate that hydrogen producers and consumers do not share such a common interest as hydrogen consumers’ final energy consumption costs vary more across scenarios and countries than electrolysers’ profits due to their role as price-setters.