High to low: Price formation and bid placement at the extremes

At high penetration levels, variable renewable energy (VRE) reshapes price formation in wholesale electricity markets by increasing both oversupply and scarcity. While the fundamental mechanisms underlying extreme prices are well documented, the role of bidding behavior in amplifying price spikes under scarcity remains underexplored. This paper develops an empirical framework to characterize how aggregate bidding patterns respond to system scarcity, as proxied by residual load, and embeds the resulting behavioral rules in an agent-based market simulation to assess their implications under a future energy-transition scenario. The framework is applied to the Belgian, Dutch, and German day-ahead markets, testing it across systems with different VRE penetration levels. The results show that aggregate supply curves become significantly steeper with residual load, while bidding volumes shift toward upper price segments. In the 2035 simulation, scarcity-induced strategic bidding increases the annual average price in Germany by 15.49% (7.38 EUR/MWh) relative to marginal-cost bidding, while the peak price rises from 153 to 561 EUR/MWh (+268%), with effects concentrated in a small share of scarcity hours. These results suggest that extreme price formation cannot be understood from fundamental supply conditions alone. As VRE penetration increases and the dispatchable margin becomes more constrained, scarcity-related bidding behavior can substantially amplify price extremes. Navigating these risks requires market monitoring that distinguishes efficient scarcity rents from strategic conduct, alongside careful policy design to manage the underlying structural exposure to scarcity—primarily sufficient cross-border interconnection and dispatchable capacity—without dampening the price signals needed for long-term adequacy.