Sheeran is in the running for his record-breaking third album "Divide," which topped the album charts in several countries.
"What these artists have in common is an infectious pleasure in music making and an arresting sense of urgency about the music they make," the jury said in a statement announcing the 12 shortlisted albums.
"They delight in exploring musical possibilities and refusing to be pinned down by genre conventions".
Sheeran is in the running for his record-breaking third album "Divide," which topped the album charts in several countries including his native Britain, Australia and the United States.
It also smashed Spotify records, drawing nearly 57 million listens on its first day of release.
The previous record was held by The Weeknd's "Starboy", which drew 29 million streams on its release date.
Despite having won several Grammys and Brit awards since he burst onto the scene with his debut album "+" in 2011, Sheeran has never won the Mercury Prize.
Established in 1992, it recognises the top album by a British or Irish artist.
London-born grime star Stormzy was shortlisted for his debut album "Gang Signs & Prayer", which the jury described as "adventurous, rueful, outraged and soulful".
The rapper said on Twitter that he was "over the moon" with his nomination.
"I put my heart, my soul and my absolute everything into making this album," he wrote.
The list also include former winners The xx for their third album "I see you" and Alt-J for "Relaxer".
"We are stunned, humbled & ecstatic to be on the Mercury Prize list," Alt-J wrote on Twitter.
Kate Tempest, already shortlisted in 2014, made the cut once more with her new "Let Them Eat Chaos" album.
In a Facebook post, she described herself as "honoured and humbled" to be recognised.
Indie guitar pop band Blossoms joined the list with their eponymous album and expressed "innumerous thank-yous" in a video posted on Twitter by band member Josh Dewhurst.
Lesser known artists whose albums were nominated include Sampha, J Hus, Glass Animals, Loyle Carner, Dinosaur and The Big Moon.
This year's winner will be announced at a September 14 show in London.