Price-caps and Efficient Pricing for the Electricity Italian Market

D'Ecclesia, Rita Laura and Gallo, Crescenzio (2002): Price-caps and Efficient Pricing for the Electricity Italian Market. Published in: Quaderni del Dipartimento di Matematica Statistica, Informatica ed Applicazioni No. 5 (2002)

Abstract

Deregulation of the electricity generating industry, under way in the United States as well as in Europe, would yield economies to operate in a more competitive environment causing improvement of efficiency and the possibility to develop related financial markets to manage price uncertainty. Electricity spot prices tend to be remarkably volatile as consequence of extreme weather conditions, therefore there seems to be sufficient price uncertainty to warrant the development of derivative markets, however it is important to verify whether the underlying spot market is sufficiently competitive and well functioning to stimulate the development of related financial markets. Analyzing the features and price volatility of European markets which undertook the same process, as well as Norwey, Germany and Spain, we formulate a simple model to control the well functioning of energy spot markets in a deregulated context. The model is tested using Norwegian, Deutsch and Spanish spot prices over the last two years in order to assess the correct price formation in competitive operating markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: Electricity market, Price limits, Market Power
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles

References

[1] E.S. Amundsen and B. Singh, 1992. Developing Futures Markets for electricity in Europe. Energy Journal 13, pp.95-113.

[2] S. Borenstein, J. Bushnell & F. Wolak. 2002, Measuring market inefficiencies in California’s restructured wholesale electricity market. Working Paper presented at the International Conference Towards a European Market of Electricity, Rome June.

[3] A. Eydeland and H. Geman, 1998, Pricing Power Derivatives. Working Paper University Paris IX DSauphine and ESSEC.

[4] A. Eydeland and H. Geman, 1999, Fundamentals of Electricity Derivatives in ”Insurance and Weather Derivatives” by H. Geman, Eds Risk Books.

[5 ] International Energy Agency, 1999, Electricity Market Reform, an IEA Handbook. OECD.

[6] R.E. Macatangay, 2000. Market definition and Dominant Position Abuse under the new electricity trading arrangments in England and Wales. Energy Policy, 29, pp 337-340.

[7] D. Newbery, 1998, Competition, contracts, and entry in the electricity spot market. Rand pp. 726-749.

[8] D.M. Newbery, 1995, Power Markets and Market Power. Energy Journal, vol.16, pp. 41-66.

[9] A. Powell 1993, Trading Forward in an imperfect market the case of electricity in Britain, Royal Economic Society pp. 444-453.

[10] A. Rudkevich and M. Duckwoirth, 1998, Modeling Electricity pricing in a deregulated generation industry : the potential for oligopoly pricing in a Poolco. Energy Journals 19, pp. 19-30.

[11] C.D. Wolfram, 1999. Measuring duopoly power in the British Electricity Spot Market, The American Economic Review, pp. 805-826.