Market Power and Transmission Congestion in the Italian Electricity Market

41 Pages Posted: 19 Jul 2014

See all articles by Simona Bigerna

Simona Bigerna

Department of Economics, University of Perugia

C. Andrea Bollino

University of Perugia - Department of Economics, Finance and Statistics

Paolo Polinori

University of Perugia - Department of Economics

Date Written: July 17, 2014

Abstract

Analysis of market power in electricity markets is relevant for understanding the competitive development of the industry's restructuring and liberalization process. Because the existing literature lacks adequate consideration of line transmission congestion, this paper sets forth a new approach to measuring market power in the Italian Power Exchange (IPEX) by explicitly taking into account transmission line congestion. We construct the residual demand curve to disentangle the measure of unilateral market power from congestion rent for the main Italian generators during the period of April 2004 to December 2007. In Italy, this was a period of stable transmission network structure. Following the approach of Wolak (2003, 2009), we measure the unilateral market power with the Lerner Index (LI) computed as the inverse of the residual demand elasticity. In conclusion, the correct modeling of the residual demand curve including transmission congestions allows us to compute the zonal LI and therefore more accurately measure the market power when congestion occurs. Our results show that various generators exercise market power in only some zones, which provides us with a deeper understanding of the IPEX and better support for designing appropriate market surveillance and competition regulation.

Keywords: Saudi Arabia, power, oil, subsidies, modeling, MPEC

Suggested Citation

Bigerna, Simona and Bollino, Carlo Andrea and Polinori, Paolo, Market Power and Transmission Congestion in the Italian Electricity Market (July 17, 2014). USAEE Working Paper No. 14-167, Available at SSRN: https://ssrn.com/abstract=2467649 or http://dx.doi.org/10.2139/ssrn.2467649

Simona Bigerna

Department of Economics, University of Perugia ( email )

Via A. Pascoli
Perugia, 06123
Italy

Carlo Andrea Bollino

University of Perugia - Department of Economics, Finance and Statistics ( email )

Perugia, 06123
Italy

Paolo Polinori (Contact Author)

University of Perugia - Department of Economics ( email )

via A. Pascoli, 20
Perugia, Perugia 06123
Italy
+39 075 5855002 (Phone)
+39 075 5855299 (Fax)

HOME PAGE: http://https://www.unipg.it/personale/paolo.polinori

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