Long-Term Simulation of the Day-Ahead Electricity Market Towards a Fully Decarbonized Economy

Frank Heinz and Reinhard Madlener
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Frank Heinz: frank.heinz@rwth-aachen.de

No No. 4/2025, FCN Working Papers from E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN)

Abstract: Day-ahead markets for electricity are important institutions in modern energy systems, but their functioning in a future, decarbonized economy has not yet been fully clarified. We address this question with a stochastic long-term simulation for the German market, in which intermittent renewable power generation and total electricity demand are modeled with separate stochastic processes. Model precision is achieved by using mean-reverting processes with time-dependent trend functions and positive dynamics that are calibrated to the current market. Model robustness is ensured by emulating a large number of different scenarios taken from recent research on a sustainable energy transition in Germany. The simulation shows that in a completely decarbonized economy, the day-ahead market for electricity continues to function: the price formation still works, the price volatility is increasing only moderately, and the electricity price remains sufficient for recovering capital investment. Consequently, the current energy-only market does not need to be complemented with capacity-oriented mechanisms. The long-term simulation further informs on the cost effectiveness of certain aspects of the ongoing sustainable energy transition, which is an important contribution to current policy. The model provides a suitable basis for future work with other stochastic methods like real options analysis, and it can be generalized to other markets.

Keywords: Sustainable Energy Transition; Day-ahead Market for Electricity; Mean-reverting Stochastic Process; Inverse Gamma Dynamics; Merit-Order Effect (search for similar items in EconPapers)
JEL-codes: C58 C61 Q02 Q41 (search for similar items in EconPapers)
Pages: 39
Date: 2025-04-01
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