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A Review of Balancing Costs in Italy before and after RES introduction

Angelica Gianfreda (), Lucia Parisio () and Matteo Pelagatti ()

No BEMPS45, BEMPS - Bozen Economics & Management Paper Series from Faculty of Economics and Management at the Free University of Bozen

Abstract: The massive introduction of RES in electricity markets is recognized to have induced a merit order effect on wholesale prices. While day-ahead prices are likely to decline as RES-E production increases, the effects on balancing market sessions are more ambiguous. Taking into account the Northern Italian zone characterized by a high solar PV and hydro penetration, we provide empirical evidence that balancing quantities decreased while costs increased between two samples associated with low (2006-08) and high (2013-15) RES levels. We estimate balancing costs for different technologies and compare their dynamics across specific hours. We find evidence of increasing balancing prices in particular market conditions, that we interpret as a signal of strategic use of real time sessions by conventional producers prone to the merit order effect in the day-ahead market. We compare our results to those obtained in the German market (where, on the contrary, balancing costs have decreased) and postulate that the different market designs may explain these results. Our findings suggest that Italian policy makers should carefully monitor all trading sessions, especially those close to real time, to avoid the exercise of market power by few operators allowed to guarantee system security and, additionally, to promptly adopt a capacity market.

Keywords: Electricity market; Merit order effect; Balancing Cost; Up-regulation; Down-regulation; Uplift (search for similar items in EconPapers)
JEL-codes: D04 D24 L1 O13 Q41 Q42 (search for similar items in EconPapers)
Pages: [22 page]
Date: 2018-01
New Economics Papers: this item is included in nep-ene and nep-reg
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