Price Formation in a Sector-Coupled Climate-Neutral Energy System

The transition to an energy system dominated by variable renewable energy will significantly reshape price formation in wholesale electricity markets. Using PyPSA-DE, an open-source, multi-vector energy system model for Germany, we analyze price formation in a sector-coupled, climate-neutral system with high temporal resolution and myopic foresight in 5year steps until full decarbonization. We demonstrate how price information can be extracted by mapping the dual variables of the optimization problem to the bids and asks of electricity technologies. Our results show a shift from distinct price levels to smoother transitions, as price-setting moves from coal and gas to flexibility technologies like batteries, pumped hydro, and electrolysis. Despite higher volatility, the fully decarbonized system clears with non-zero prices in 82 % of all hours. Our results suggest flexibility and cross-sectoral demand bidding play a vital role in stabilizing electricity prices in a climate-neutral future.