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

Author

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  • 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
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    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).
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    7. Holmberg, Par, 2008. "Unique supply function equilibrium with capacity constraints," Energy Economics, Elsevier, vol. 30(1), pages 148-172, January.
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    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. repec:gam:jsusta:v:8:y:2016:i:2:p:154:d:63907 is not listed on IDEAS
    3. repec:eee:rensus:v:79:y:2017:i:c:p:533-543 is not listed on IDEAS
    4. 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.

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