Electricity Derivatives and the Spot Market in Italy. Mitigating Market Power in the Electricity Market

37 Pages Posted: 25 May 2005 Last revised: 6 Apr 2012

See all articles by Laura Cavallo

Laura Cavallo

Prime Minister's Office - Department of Economic Affairs

Valeria termini

Faculty of Economics University of RomaTre Italy; AEEG Italian Regulatory Authority for Electricity and Gas

Date Written: April 2005

Abstract

The increased uncertainty regarding electricity prices caused by the liberalization of the sector and the launch of wholesale spot electricity markets has led to the development of financial derivatives both in regulated and over-the-counter markets. The ability of the spot market to stimulate the economic efficiency and competitiveness of the energy sector depends crucially on its efficiency and liquidity. However, as the theoretical analyses developed after the Californian crisis show, the concentration of spot-market transactions in the day-ahead market in a non-competitive industry exposes electricity prices to excessive peaks and volatility. This is due to their higher exposure to the exercise of market power by the dominant producer as well as to contingent events. This paper argues that introducing a regulated market for standardized derivatives, while giving consumers a strategic role in the market, would contribute to solving the trade-off between the liquidity of the market and the stability of the system. Some interesting policy implications emerge from the analysis. (Version: April 2003)

Keywords: Derivatives, Electricity, Market power, Hedging

JEL Classification: G18, L94, Q41, Q48

Suggested Citation

Cavallo, Laura and Termini, Valeria A., Electricity Derivatives and the Spot Market in Italy. Mitigating Market Power in the Electricity Market (April 2005). CEIS Working Paper No. 70. Available at SSRN: https://ssrn.com/abstract=728423 or http://dx.doi.org/10.2139/ssrn.728423

Laura Cavallo

Prime Minister's Office - Department of Economic Affairs ( email )

Via della Mercede 9
00187 Rome
Italy
+39 06 67796634 (Phone)
+39 06 67796663 (Fax)

Valeria A. Termini (Contact Author)

Faculty of Economics University of RomaTre Italy ( email )

Via Silvio d'Amico 77
Roma
Italy
+393351449283 (Phone)

AEEG Italian Regulatory Authority for Electricity and Gas ( email )

Piazza Cavour, 5
Milano, 00187
Italy

HOME PAGE: http://www.autorita.energia.it/it/inglese/contacts/contatti.htm

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