Risk management scenarios: how energy companies navigate market uncertainty

Energy markets are notoriously volatile, driven by shifting geopolitical landscapes, evolving policy frameworks, and the accelerating energy transition. In this complex environment, risk management scenarios serve as essential tools for energy companies to make informed decisions. These simulations help prepare for potential price spikes, evaluate investment risks, and optimise strategies for buying and selling energy.  

Why use scenarios in risk management?  

Simulations empower risk managers with insights into future market behaviour under different conditions. By modelling a range of plausible futures, companies can:  

• Secure contracts early to hedge against price volatility.  

• Evaluate the impact of policy changes or supply disruptions before committing to large infrastructure projects.  

• Plan flexible strategies tailored to both optimistic and adverse market conditions.  

Power market simulations: tools of the trade  

One widely used tool in European power market simulations is Power2Sim, which models the future power market up to the year 2060 with hourly resolution. It incorporates:  

• Data from trusted sources like Eurostat, ENTSO-E, and EU energy trend reports.  

• Weather profiles (e.g., from 2009) to model renewable generation patterns.  

• Sector coupling dynamics (e.g., electrolysers, heat pumps or e-mobility) in all scenarios.  

• Stand-alone battery storage systems  

In the Nordic region, the EMPS model—developed by SINTEF Energy Research—is the go-to solution for hydro-dominated power systems with significant share of intermittent renewable capacity. It enables detailed, long-term stochastic simulations of production and spot price behaviour across Nordic countries. New flexibility sources like BESS and flexible PtX demand is also integrated part of the model. 

Risk scenarios in energy market simulations  

The European fundamental model and power price scenarios 

Our European power price scenarios are based on our in-house fundamental model Power2Sim. Power2Sim is a merit-order-based model that simulates hourly electricity prices up to 2060. Supply and demand are calculated for each hour, with the price being determined by the marginal costs of the most expensive power plant still required. The following factors are therefore taken into account and modelled in the fundamental model: 

• Thermal power plants (gas, coal, nuclear) >20 MW, are modelled using our own power plant directory. Assumptions are also made regarding start-up costs and must-run shares. 

• CO₂ and commodity prices which influence marginal costs of the thermal power plants, are also considered. Therefore, we consider for the short-term the future market prices and for the long-term we considered the prices assumption from the World Energy Outlook. 

• Renewable energies are based on scaled historical weather data (2009) and country-specific feed-in profiles are used for solar, wind onshore and wind offshore. 

• Run-of-river power plants are modelled using monthly profiles and thus lead to a monthly base load generation. Electricity generation from reservoirs is modelled using a ‘reservoir operating costs’ model.  

• The cross-border interconnection capacities, i.e. the imports and exports of electricity between countries, are then analysed. This iterative process equalises the prices until either the prices match or the cross-border interconnection capacities are exhausted. 

• On the demand side, we make a distinction between inflexible demand and flexible demand. For the flexible demand, we model electrolysers, heat pumps and e-mobility. As a further flexibility option, we also model large-scale battery storage facilities that are active on the day-ahead market. 

As a result, the hourly electricity prices of each hour are simulated up to 2060. In our three European power price scenarios (Central, Tension, GoHydrogen), we then assume how the influencing factors (e.g. development of renewable capacities or commodity prices) will develop based on the storyline. 

1. Central scenario  

The Central scenario assumes a steady, target-driven energy transition aligned with national and EU-level goals. Key features include:  

• Renewable energy expansion and increased demand.  

• LNG world market prices driving natural gas costs.  

• Gradual replacement of fossil gas with green hydrogen.  

• High EUA prices influenced by the ‘Announced Pledges’ scenario of the World Energy Outlook (WEO) 2024.  

• A decentralised energy system with rising flexible electricity demand.  

2. Tensions scenario  

In Tensions, the energy transition faces persistent implementation challenges. Key drivers include:  

• High gas prices due to competition with Asia for LNG due to geopolitical tensions.  

• Political issues in natural gas supply.  

• Slower renewables expansion due to delaying renewable energy projects due to government tenders and lack of capital for investing in it. 

• Sharp increases in CO₂ prices, reflecting the ‘Net Zero by 2050’ scenario of the WEO.  

3. GoHydrogen scenario  

This scenario envisions the EU achieving climate neutrality by 2050 using green hydrogen as a core energy carrier. It is characterised by:  

• Significant electrification of the transport sector and electrolyser deployment.  

• Rapid growth in renewable capacity to meet rising electricity demand.  

• Phased-out fossil gas between 2030–2040 and replace it with hydrogen.  

• High and sustained carbon pricing to support decarbonisation, reflecting the ‘Net Zero by 2050’ scenario of the WEO 

4. Sensitivity scenario: delayed EEG  

Based on the Central scenario but with weaker support for renewables in Germany, this sensitivity assumes:  

• Slower renewable rollout than expected in the German ‘ErneuerbareEnergienGesetz’.  

• A prolonged reliance on thermal-fired generation.  

• Renewable growth catching up to targets by 2050 of the Central scenario 

• No changes in assumptions for other European countries.  

The Nordic scenario   

The Long-Term Power Outlook is Montel SysPower’s flagship report for the Nordic market.  It focuses on the unique characteristics of power markets in Norway, Sweden, Finland, and Denmark regions where hydropower plays a dominant role in electricity generation. Three Baltic countries Estonia, Latvia, Lithuania is covered participating in the Nordpool market are also covered by the model 

 This scenario is designed to capture the intricacies of a hydro-dominated system, its interaction with renewables like wind and biomass, and its evolving relationship with the broader European energy market.   The report offers comprehensive analysis of power market developments and serves as a key input for long-term modelling. 

All data—inputs, outputs, and model results—are accessible through the web-based SYSPOWER platform, which also supports data extraction. 

Hydrological dynamics: reservoir levels and inflow uncertainty   

One of the key features of the Nordic energy system is its reliance on reservoir-based hydropower, which enables significant storage flexibility. The scenario incorporates historical and projected inflow patterns, influenced by climate change, seasonal snowmelt, and precipitation trends. Variability in inflows presents both risks and opportunities: wet years can lead to surplus generation and lower prices, while dry years can strain supply and raise volatility.   

Accurate forecasting of water inflows is essential for price formation and generation planning, particularly in Norway and Sweden, which possess the bulk of reservoir capacity in the region. The scenario also takes into account multi-year storage strategies, where water is stored across seasons or years depending on price signals and future expectations.   

Renewable integration and system flexibility   

In addition to hydropower, the Nordic countries are rapidly expanding their wind energy portfolios. This growth adds variability to the generation mix and requires a well-coordinated strategy to manage intermittency and grid balancing. The Nordic Scenario assesses how existing flexible hydro capacity can complement the rise in non-dispatchable renewables, ensuring grid stability while decarbonising the energy supply. We estimate variability as well connected to onshore, offshore wind and solar production. This is rather important particular for hedging purposes and investment assertion.  

Cross-border market coupling   

A major component of the Nordic Scenario is its emphasis on market integration with continental Europe. Norway, Sweden, and Denmark are already highly interconnected with Germany, the Netherlands, and the UK through various HVDC (High Voltage Direct Current) links. These interconnections allow the Nordic region to export low-carbon electricity during surplus periods and import during shortages, enhancing energy security and price convergence across borders. The scenario models how price signals in Central Europe affect Nordic exports and inflows, especially during peak demand seasons or when Central European markets experience gas supply disruptions or high carbon prices.   

Policy influence and long-term planning   

The Nordic Scenario also factors in national energy policies and most updated plans from the Nordic TSOs. These policy goals shape investment trends in new capacity (e.g., offshore wind, battery storage) and influence long-term planning for grid modernisation and decarbonisation pathways.  Moreover, the scenario incorporates the EU’s Fit for 55 package and other regional regulatory frameworks that affect emission trading, energy taxation, and cross-border cooperation.   

Strategic implications   

For energy companies and policymakers, the Nordic Scenario provides a framework to:   

• Complete overview of the political, economic and energy changes during the year 

• Review of the most development in new technologies like BESS, electrolysers, SMR 

• Assessment of the expected price development in different scenarios  

• Annual, and monthly capture rates and captured prices for onshore/offshore wind and solar for each price area  

• Anticipate hydropower and renewable production under different climate and inflow conditions.   

• Future of the aging nuclear fleet in Nordic and possibilities for extension of it including SMR options 

• Plan for renewable expansion and profitability of each generation type: solar, onshore/offshore wind based on the captured prices 

• Up to date internal and external grid development plans and its role in balancing supply and demand.   

• Adjust trading strategies based on regional and continental market shifts.  

• Need for flexibility in terms of BESS and green hydrogen penetration in form of PtX demand and hydrogen fuelled power stations  

This scenario is especially valuable for traders, analysts, and developers and infrastructure planners seeking to understand how Nordic markets can serve as a model for low-carbon, resilient, and interconnected energy systems.  

Conclusion  

Scenario-based risk management enables energy companies to build resilience in uncertain markets. Whether preparing for geopolitical tensions or planning a hydrogen-led future, these simulations offer the foresight needed to stay competitive, compliant, and cost-effective.