With the transformation towards a climate-neutral energy system, uncertainties and price fluctuations in electricity markets are increasing. The large-scale expansion of renewable energies and the electrification of heating and transport make electricity generation more weather-dependent and demand harder to forecast. This complicates both the investment decisions of market participants and the effectiveness of policy instruments. Existing energy system models capture the observed volatilities and spreads only to a limited extent.
The MERIT project improves the modeling of changing risk structures in the European electricity market and develops solutions for future-proof risk management. To this end, MERIT combines fundamental energy market models with data-driven, stochastic, and econometric methods. The project focuses on the drivers of price fluctuations in short-term markets (day-ahead and intraday), the assessment of investment risks, and the (inter-)action of market-based and government hedging instruments such as futures, Contracts for Difference (CfDs), Power Purchase Agreements (PPAs), and capacity mechanisms.
Project objectives
- Identification and characterization of the drivers of price fluctuations and investment risks in future electricity markets
- Advancement of fundamental energy market models to capture volatility, spreads, and market mechanisms more realistically
- Assessment of investment risks as well as market-based and government hedging instruments under different scenarios and market design options
- Derivation of recommendations for robust risk management and stable investment incentives for market participants and policymakers
Key research questions
- Which factors drive price fluctuations in future electricity markets, and how do they change as the energy transition progresses?
- How can volatilities and spreads in short-term markets be represented more realistically in fundamental energy market models?
- How do hedging instruments such as futures, CfDs, PPAs, and capacity contracts – individually and in combination – affect the investment risks of different market participants?
- Which further developments of short-term markets and hedging products can reduce risks and promote investments in renewable energies and flexible technologies?
The role of EWI in MERIT
EWI coordinates the joint project and leads the work packages “Risks and Drivers of Price Fluctuations” (WP 1) and “Price Fluctuations in Energy Market Models and Model Development” (WP 3).
- Systematic analysis of the drivers of price fluctuations and investment risks, and contribution to the development of scenarios for the long-term evolution of uncertainties
- Advancement of the fundamental model MELI and the intraday model DAISY to better capture volatility, spreads, and new market dynamics
- Development of a model-based assessment methodology for the systematic evaluation of hedging and investment decisions under uncertainty
- Execution of the model runs to quantify price fluctuations and economic assessment of the results with regard to systemic risks and investment uncertainties
