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Price regimes in an energy island: Tacit collusion vs. cost and network explanations

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  • Sapio, Alessandro
  • Spagnolo, Nicola

Abstract

In this paper, we explore the determinants of wholesale electricity prices in an energy island such as Sicily, by estimating regime switching models with fixed and time-varying transition probabilities on daily data in the 2012–2014 period. Explanatory variables used alternatively in the price equation and in the switching equation include power demand, the supply of intermittent renewables, the residual supply index, and a congestion indicator. Four competing hypotheses on the determinants of price regimes are tested (arbitrary market power, cost profile, tacit collusion, congestion) in order to understand why, despite the general trend of declining prices induced by renewables in southern Italy, Sicilian prices stood high. The pattern of estimated coefficients is consistent with a tacit collusion story.

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  • Sapio, Alessandro & Spagnolo, Nicola, 2016. "Price regimes in an energy island: Tacit collusion vs. cost and network explanations," Energy Economics, Elsevier, vol. 55(C), pages 157-172.
    • Handle: RePEc:eee:eneeco:v:55:y:2016:i:c:p:157-172
    DOI: 10.1016/j.eneco.2016.01.008
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    More about this item

    Keywords

    Electricity price; Energy island; Markov regime-switching; Price regimes; Tacit collusion;
    All these keywords.

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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