Modelling the Italian electricity price

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Valeria Di Cosmo

Economic and Social Research Institute Trinity College, Dublin

valeria.dicosmo@esri.ie

IEB Symposium, 2015

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Motivation

1. Check if determinants of Italian spot electricity price have

changed since the market creation in 2004

2. Understand the impact of expectations and renewables on the

Italian electricity price

3. Assess the role of fuel markets

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Description of the Italian electricity

market

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Modelling the Italian electricity price Italian market

The Italian spot market: MGP

Auction market (not continuous trading market)

1. Hourly energy blocks traded for the next day

2. Participants in each zone submit offers/bids where they specify the quantity and the minimum/maximum price at which they are willing to sell/purchase

3. Bids/offers are accepted under the economic merit-order criterion and taking into account transmission capacity limits between zones. Zonal marginal clearing price.

4. The accepted demand bids pertaining to consuming units belonging to Italian geographical zones are valued at the Prezzo Unico Nazionale (PUN national single price); this price is equal to the average of the prices of geographical zones, weighted for the quantities purchased in these zones.

5. GME acts as a central counterparty.

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The Italian spot market, intraday: MI and MSD

Other spot markets:

I MI: Allows Market Participants to modify the schedules

defined in the MGP by submitting additional supply offers or demand bids. The MI takes place in four sessions: MI1, MI2, MI3 and MI4.

I MSD: Allows Terna S.p.A. to procure the resources required

for managing, operating, monitoring and controlling the power system.

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Modelling the Italian electricity price Italian market

The Italian forward market

I Data on PUN forward market available since mid-2008

I Both physical and financial

I Trading on continuous basis, all participants admitted

I Bilateral contracts allowed

Figure: Pun and Pun forward (1month ahead): 2008-2012

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Data description

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Modelling the Italian electricity price Data

Determinants of the Italian electricity price

Possible structural break in February 2009 (tested)

Figure: PUN, gas NPV and brent (2007-2012) ¿/ MWh

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Prices - PUN

Figure: PUN distribution - average 2008-2012

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Modelling the Italian electricity price Data

Loads

Figure: Load distribution - average 2008-2012

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Renewables

Figure: Generation by renewables - MWh 2005-2012

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Modelling the Italian electricity price Estimation

Estimation

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Estimation

PUNt =α+β1Lt+β2Gast−1+β3Brentt−1

+β4PUNfwdt +β5PC+β6W +

X

κsD_ts+t

wheret =ρ0t−1+ρ1t−7 and

PUNt = electricity price

L= demand

W= wind

PC =CO2permit prices

D= dummy variables (months, years and day of week)

PUNt

fwd = PUN forward calculated one-month ahead the delivery date

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Modelling the Italian electricity price Results

Results

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Results - Prices, before the structural break

Table: Results before the structural break (01 April 2004-12 February 2009) Loads 0.00235*** (30.11) Gast−1 0.0266 (0.45) Brentt−1 0.449** (3.19) Dummies YES*** AR1 0.625*** (55.64) AR7 0.312*** (24.3) Obs 1506 16

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Results - Prices, before the structural break

1. Gas not significant in determining PUN (long term contracts

indicized to brent)

2. Brent is significant and positive

3. Wind, PUN forward andCO2 emissions (available from mid

2008) are not significant.

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Results - Prices, after the structural break

Table: Results after the structural break (12 February 2009-31 December 2012) Loads 0.00156*** (8.44) Gast−1 0.204** (3.07) Brentt−1 -0.145 (0.99) PUNfwd 0.378** (3.04) WindGen -0.0113* (2.02) Dummies YES*** AR1 0.542*** (32.06) AR7 0.0857*** (3.61) Obs 1302 18

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Results - Prices, after the structural break

1. Gas is one of the main determinant of PUN after the 2008

brent crises

2. Expectation reflected by PUN forward matter in determining

the spot price of electricity

3. Wind is significant and has a negative impact on spot prices.

I However, wind data are annual so this result should be double checked with better data.

4. CO2 price not significant

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Conclusions

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Modelling the Italian electricity price Conclusions

Conclusions

1. Determinants of PUN changed after the structural break

-beginning of 2009

I before the break oil was significant in determining PUN I after the break only gas matters in determining PUN

2. Expectation matters in determining spot prices

I No information on bilateral contracts

3. Investment in renewables is reducing the spot prices

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Conclusions

-beginning of 2009

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Conclusions

-beginning of 2009

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Conclusions

-beginning of 2009

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Conclusions

-beginning of 2009

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Conclusions

-beginning of 2009

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Conclusions

Thank you!

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Summary statistics

Table: Italian electricity market main indicators (2004-2012) Year PUN (¿/MWh) Total Volumes (MWh) Liquidity (%) Participants (31 Dec)

average min max

2004 51.6 1.1 189.19 231572 29,1 73 2005 58.59 10.42 170.61 323185 62,8 91 2006 74.75 15.06 378.47 329790 59,6 103 2007 70.99 21.44 242.42 329949 67,1 127 2008 86.99 21.54 211.99 336961 69,0 151 2009 63.72 9.07 172.25 313425 68,0 167 2010 64.12 10 174.62 318562 62,6 198 2011 72.23 10 164.8 311494 57,9 181 2012 75.48 12.14 324.2 298669 59,8 192 Source: GME, 2013

Data for 2004 are from April to December

Modelling the Italian electricity price