IDEAS home Printed from https://ideas.repec.org/a/eee/enepol/v85y2015icp445-454.html
   My bibliography  Save this article

Marginal cost and congestion in the Italian electricity market: An indirect estimation approach

Author

Listed:
  • Bigerna, Simona
  • Andrea Bollino, Carlo
  • Polinori, Paolo

Abstract

In this paper we construct an indirect measure of the supply marginal cost function for the main generators from the observed bid data in the Italian electricity market in the period 2004–2007. We compute the residual demand function for each generator, taking explicitly into account the issue of transmission line congestion. This procedure allows recovering correct zonal Lerner index and the implied measure of the marginal cost function. We find evidence of a stable U-shaped marginal cost function for three main Italian generators, but a flat function for ENEL, the former national monopolist. The policy relevance of our approach lies in the possibility to offer some empirical knowledge of the marginal cost function of each generator to the regulator to design appropriate policy measures geared to the promotion of competitive market conditions. We propose a new market surveillance mechanism, which is based on the principle of sanctioning excessive deviations from the estimated measure of the marginal cost function presented in this work.

Suggested Citation

  • Bigerna, Simona & Andrea Bollino, Carlo & Polinori, Paolo, 2015. "Marginal cost and congestion in the Italian electricity market: An indirect estimation approach," Energy Policy, Elsevier, vol. 85(C), pages 445-454.
  • Handle: RePEc:eee:enepol:v:85:y:2015:i:c:p:445-454
    DOI: 10.1016/j.enpol.2015.04.009
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0301421515001512
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.enpol.2015.04.009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Simona Bigerna and Carlo Andrea Bollino, 2014. "Electricity Demand in Wholesale Italian Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    2. Gianfreda, Angelica & Grossi, Luigi, 2012. "Forecasting Italian electricity zonal prices with exogenous variables," Energy Economics, Elsevier, vol. 34(6), pages 2228-2239.
    3. Holmberg, Pär & Newbery, David, 2010. "The supply function equilibrium and its policy implications for wholesale electricity auctions," Utilities Policy, Elsevier, vol. 18(4), pages 209-226, December.
    4. Quick, David M. & Carey, Janis M., 2002. "Transmission capacity and market power: the effect on a dominant generation firm," Energy Policy, Elsevier, vol. 30(8), pages 699-708, June.
    5. Willems, Bert & Rumiantseva, Ina & Weigt, Hannes, 2009. "Cournot versus Supply Functions: What does the data tell us?," Energy Economics, Elsevier, vol. 31(1), pages 38-47, January.
    6. Boffa, Federico & Pingali, Viswanath & Vannoni, Davide, 2010. "Increasing market interconnection: An analysis of the Italian electricity spot market," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 311-322, May.
    7. Bosco, Bruno & Parisio, Lucia & Pelagatti, Matteo, 2013. "Price-capping in partially monopolistic electricity markets with an application to Italy," Energy Policy, Elsevier, vol. 54(C), pages 257-266.
    8. Simona Bigerna, Carlo Andrea Bollino and Paolo Polinori, 2016. "Market Power and Transmission Congestion in the Italian Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    9. Boffa, Federico & Pingali, Viswanath & Vannoni, Davide, 2010. "Increasing market interconnection: An analysis of the Italian electricity spot market," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 311-322, May.
    10. Ali Hortaçsu & Steven L. Puller, 2008. "Understanding strategic bidding in multi‐unit auctions: a case study of the Texas electricity spot market," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 86-114, March.
    11. Holmberg, Par, 2008. "Unique supply function equilibrium with capacity constraints," Energy Economics, Elsevier, vol. 30(1), pages 148-172, January.
    12. repec:kap:iaecre:v:13:y:2007:i:4:p:415-432 is not listed on IDEAS
    13. Domanico, Fabio, 2007. "Concentration in the European electricity industry: The internal market as solution?," Energy Policy, Elsevier, vol. 35(10), pages 5064-5076, October.
    14. Shaun D. MCRAE & Frank A. WOLAK, 2009. "How Do Firms Exercise Unilateral Market Power? Evidence from a Bid-Based Wholesale Electricity Market," RSCAS Working Papers 2009/36, European University Institute.
    15. Bruno Bosco & Lucia Parisio & Matteo Pelagatti, 2006. "Deregulated Wholesale Electricity Prices in Italy," Working Papers 20060301, Università degli Studi di Milano-Bicocca, Dipartimento di Statistica, revised Apr 2006.
    16. Bosco, Bruno & Parisio, Lucia & Pelagatti, Matteo, 2012. "Strategic bidding in vertically integrated power markets with an application to the Italian electricity auctions," Energy Economics, Elsevier, vol. 34(6), pages 2046-2057.
    17. Thomas, Steve, 2003. "The Seven Brothers," Energy Policy, Elsevier, vol. 31(5), pages 393-403, April.
    18. Andrew Sweeting, 2007. "Market Power In The England And Wales Wholesale Electricity Market 1995-2000," Economic Journal, Royal Economic Society, vol. 117(520), pages 654-685, April.
    19. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, vol. 92(5), pages 1376-1405, December.
    20. Frank A. Wolak, 2003. "Measuring Unilateral Market Power in Wholesale Electricity Markets: The California Market, 1998–2000," American Economic Review, American Economic Association, vol. 93(2), pages 425-430, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Simona Bigerna and Carlo Andrea Bollino, 2016. "Optimal Price Design in the Wholesale Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Bollino-M).
    2. Sulaima, Mohamad Fani & Dahlan, Nofri Yenita & Yasin, Zuhaila Mat & Rosli, Marlinda Mohd & Omar, Zulkiflee & Hassan, Mohammad Yusri, 2019. "A review of electricity pricing in peninsular Malaysia: Empirical investigation about the appropriateness of Enhanced Time of Use (ETOU) electricity tariff," Renewable and Sustainable Energy Reviews, Elsevier, vol. 110(C), pages 348-367.
    3. Sapio, Alessandro & Spagnolo, Nicola, 2020. "The effect of a new power cable on energy prices volatility spillovers," Energy Policy, Elsevier, vol. 144(C).
    4. Wang, Chen & Zhou, Kaile & Yang, Shanlin, 2017. "A review of residential tiered electricity pricing in China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 79(C), pages 533-543.
    5. Schreiner, Lena & Madlener, Reinhard, 2019. "Investing in power grid infrastructure as a flexibility option: A DSGE assessment for Germany," FCN Working Papers 11/2019, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised 01 Apr 2020.
    6. repec:gam:jsusta:v:8:y:2016:i:2:p:154:d:63907 is not listed on IDEAS
    7. Sapio, Alessandro, 2019. "Greener, more integrated, and less volatile? A quantile regression analysis of Italian wholesale electricity prices," Energy Policy, Elsevier, vol. 126(C), pages 452-469.
    8. Komorowska, Aleksandra & Benalcazar, Pablo & Kaszyński, Przemysław & Kamiński, Jacek, 2020. "Economic consequences of a capacity market implementation: The case of Poland," Energy Policy, Elsevier, vol. 144(C).
    9. Alessandro Toscano & Filiberto Bilotti & Francesco Asdrubali & Claudia Guattari & Luca Evangelisti & Carmine Basilicata, 2016. "Recent Trends in the World Gas Market: Economical, Geopolitical and Environmental Aspects," Sustainability, MDPI, Open Access Journal, vol. 8(2), pages 1-24, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Simona Bigerna, Carlo Andrea Bollino and Paolo Polinori, 2016. "Market Power and Transmission Congestion in the Italian Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    2. Brown, David P. & Eckert, Andrew, 2021. "Analyzing firm behavior in restructured electricity markets: Empirical challenges with a residual demand analysis," International Journal of Industrial Organization, Elsevier, vol. 74(C).
    3. Carlos Suarez, 2021. "Mixed Oligopoly and Market Power Mitigation: Evidence from the Colombian Wholesale Electricity Market," IREA Working Papers 202101, University of Barcelona, Research Institute of Applied Economics, revised Jan 2021.
    4. Lundin, Erik & Tangerås, Thomas P., 2020. "Cournot competition in wholesale electricity markets: The Nordic power exchange, Nord Pool," International Journal of Industrial Organization, Elsevier, vol. 68(C).
    5. Carlos Suarez, 2021. "Private management and strategic bidding behavior in electricity markets: Evidence from Colombia," IREA Working Papers 202102, University of Barcelona, Research Institute of Applied Economics, revised Jan 2021.
    6. David P. Brown & Derek E. H. Olmstead, 2017. "Measuring market power and the efficiency of Alberta's restructured electricity market: An energy-only market design," Canadian Journal of Economics, Canadian Economics Association, vol. 50(3), pages 838-870, August.
    7. Bigerna, Simona & Bollino, Carlo Andrea & D'Errico, Maria Chiara & Polinori, Paolo, 2015. "Competitive equilibrium in the italian wholesale electricity market," MPRA Paper 68310, University Library of Munich, Germany.
    8. Brown, David P. & Eckert, Andrew & Eckert, Heather, 2018. "Carbon pricing with an output subsidy under imperfect competition: The case of Alberta's restructured electricity market," Resource and Energy Economics, Elsevier, vol. 52(C), pages 102-123.
    9. Mulder, Machiel & Petrikaitė, Vaiva & Scholtens, Bert, 2015. "Distributed energy generation techniques and the competitive fringe effect in electricity markets," Resource and Energy Economics, Elsevier, vol. 42(C), pages 125-140.
    10. Bruno Bosco, Lucia Parisio and Matteo Pelagatti, 2016. "Price coordination in vertically integrated electricity markets. Theory and empirical evidence," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    11. Rossetto, F. & Grossi, L. & Pollitt, M., 2019. "Assessing Market Power in the Italian Electricity Market: A synthetic supply approach," Cambridge Working Papers in Economics 1975, Faculty of Economics, University of Cambridge.
    12. Graf, Christoph & Wozabal, David, 2013. "Measuring competitiveness of the EPEX spot market for electricity," Energy Policy, Elsevier, vol. 62(C), pages 948-958.
    13. 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.
    14. Holmberg, Pär & Willems, Bert, 2015. "Relaxing competition through speculation: Committing to a negative supply slope," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 236-266.
    15. Pär Holmberg, 2017. "Pro‐competitive Rationing in Multi‐unit Auctions," Economic Journal, Royal Economic Society, vol. 127(605), pages 372-395, October.
    16. Matthias Janssen & Magnus Wobben, "undated". "Electricity Pricing and Market Power - Evidence from Germany," Working Papers 200121, Institute of Spatial and Housing Economics, Munster Universitary.
    17. Pär Holmberg & Andy Philpott, 2014. "Supply function equilibria in transportation networks," Cambridge Working Papers in Economics 1421, Faculty of Economics, University of Cambridge.
    18. David P. Brown & Andrew Eckert, 2018. "Analyzing the Impact of Electricity Market Structure Changes and Mergers: The Importance of Forward Commitments," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 101-137, February.
    19. Mulder, Machiel & Schoonbeek, Lambert, 2013. "Decomposing changes in competition in the Dutch electricity market through the residual supply index," Energy Economics, Elsevier, vol. 39(C), pages 100-107.
    20. Paul Klemperer, 2007. "Bidding Markets," Journal of Competition Law and Economics, Oxford University Press, vol. 3(1), pages 1-47.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:enepol:v:85:y:2015:i:c:p:445-454. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/enpol .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Nithya Sathishkumar (email available below). General contact details of provider: http://www.elsevier.com/locate/enpol .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.