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Competition in the Italian electricity market: The unforeseen social welfare losses of reform

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  • Maria Chiara D?Errico

Abstract

The worldwide wave of reforms investing power industry has created new challenges to both supply demand side management. After deregulation, electric utilities restructured their opera-tions from vertically integrated mechanisms to open market systems in order to establish a new competitive sector. Reform has involved also the Italian power sector, but competition, as lar-gely shown by the empirical literature particularly in the first years of reform, has been far to be reached, and the electricity markets has been characterized by conditions of oligopoly and exercise of market power. This paper aims to analyze welfare loss and deviation from the competitive equilibrium recorded in the day ahead Italian electricity market after the first wave of reforms was almost implemented. The study presents a theoretical and empirical model to construct a competitive equilibrium, estimating market power, both, on the supply and demand sides of the day ahead electricity market. Results show the effect of non-competitive equilibriums for the hourly markets in the period 2013-2014. In an ideal competitive market, prices would be lower than historical prices by about 2-5% and quantities would be higher by about 0.5-1%.

Suggested Citation

  • Maria Chiara D?Errico, 2020. "Competition in the Italian electricity market: The unforeseen social welfare losses of reform," ECONOMICS AND POLICY OF ENERGY AND THE ENVIRONMENT, FrancoAngeli Editore, vol. 2020(2), pages 75-91.
    • Handle: RePEc:fan:efeefe:v:html10.3280/efe2020-002004
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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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