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The long-run relationship between the Italian day-ahead and balancing electricity prices

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Abstract

We study the convergence of day-ahead and balancing prices for the Italian power market. The zonal time-series of the prices are evaluated, seasonally adjusted and tested to assess their long-run properties. We focus on the dynamic behavior of the four continental price zones of Italy (North, Central-North, Central-South and South). Using a sample of data that spans the last decade and applying the fractional cointegration methodology, we show the existence of long-run relationships. This signals the existence of convergence between prices in each zone but zone Central-South, where prices are divergent. We also measure the average price difference, and analyse how it evolves over time. Price differences dynamically reduce for all zones except for Central-South. We comment the results and provide an interpretation for the differences across zones. We also discuss policy consequences for both Italian and other markets.

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Notes

  1. In this paper we refer to the TSO as a general term, regardless of whether it is an Independent System Operator as in the USA or a proper Transmission System Operator as in Europe.

  2. The European Commission [17] defines balancing services as “balancing energy or balancing capacity or both”, where the former is defined as “energy used by TSOs to perform balancing and provided by a balancing service provider” and the latter is “a volume of reserve capacity that a balancing service provider has agreed to hold and in respect to which the balancing service provider has agreed to submit bids for a corresponding volume of balancing energy to the TSO for the duration of the contract”.

  3. From now onward, we shall refer to balancing service providers as power plants, for the sake of simplicity, even though sometimes these services can also be provided by load serving entities.

  4. Please see below Sect. 3.1 for further details about the Italian market.

  5. Note that the Italian dispatching service market does not include the whole set of ancillary services that are provided by power plants. In particular, emergency restoration services such as black start are not exchanged in the market but are regulated through a cost-based mechanism. For this reason, we shall not refer to the prices of the MSD as the ancillary service prices but we prefer to refer to it as the balancing prices. where the Italian TSO (Terna s.p.a.) acquires the following balancing services: FCR—Frequency Controlled Reserves; FRR—Frequency Restoration Reserves and RR—Replacement Reserves. The Italian MSD consists of a sequence of six auctions, each split in two parts, a phase of reserves procurement and a subsequent phase of activation of the reserves. The former is called ex-ante MSD; the latter Balancing Market (MB—Mercato del Bilanciamento in Italian). Note that the Italian terminology is in contrast with the European one, which defines balancing market as “the entirety of institutional, commercial and operational arrangements that establish market-based management of balancing” (see European Commission [17]), and not just the activation phase as for the Italian case. In this paper, we follow the European definition and refer to the whole MSD as the balancing market since that is the marketplace where the whole balancing services are procured.

  6. The TSO states that the purchases of balancing services in the ex-ante MSD is done to relieve internal congestion also. This is due to the specific features of Italian market, which is characterized by relevant transmission capacity limits within zones. This is different from other markets, such as the German one, where congestion management services are remunerated on a regulated basis. It is not possible to assess how much of the services are purchased for congestion management purposes and how much for balancing needs. For this reason, we shall attribute the results of the MSD entirely to balancing services.

  7. There is also a limited production of specific types of eligible RES or Load Serving Entities, called UVAC and UVAM. We do not consider them since they have been introduced only recently and their relevance is negligible at present.

  8. See Cretì and Fontini [13, Ch.11] for introduction and more detailed explanations of balancing markets and the double-settlement systems.

  9. The irregular patterns of MSD data, characterized by missing observations, instability in the seasonal patterns, presence of structural breaks in the mean as well as in the variance do not allow us to analyze the two zones of Sicily and Sardinia. The zones of the two islands Sardinia and Sicily are scarcely interconnected with the continent. Furthermore, their interconnection capacity has been changing throughout the sample period. Markets in the islands have their own peculiarities. In Sardinia there are no gas-fired power plants since there are no natural gas pipelines. This is a sharp difference compared with the rest of Italy, where natural gas fired plants are the majority of thermal power plants. In Sicily, balancing prices have been administratively set under a special regime from 2016 onward, due to the lack of sufficient thermal capacity in the MSD. Due to their peculiarities, we believe that there is no lack of generality from not having these two zones analyzed.

  10. de Menezes et al. [14] and Gianfreda et al. [22] assess the importance of fuel prices on DA, intraday and balancing costs, for the European and Italian markets, respectively.

  11. The structure of the \(\hbox {FVECM}_{d,b}\) model is very similar to that of the \(\hbox {FCVAR}_{d,b}\) model,

    $$\begin{aligned} \Delta ^d X_t =\xi +\alpha \beta ^\prime \Delta ^{d-b}L_b X_t+\sum _{i=1}^k \Gamma _i \Delta ^d L_b^i X_t +\varepsilon _t \quad \varepsilon _t \sim iid (0,\Omega ), \end{aligned}$$

    as it only replaces the fractional lag operator, \(L_b^i\), with the standard lag operator, \(L^i\), in the short run dynamics.

  12. The supplementary material also includes the correlogram of the FVECM residuals and of the error correction terms.

  13. We thank an anonymous reviewer for pointing out this effect.

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Authors and Affiliations

  1. Department of Statistical Sciences, University of Padova, Via C. Battisti 241, 35121, Padua, Italy

    Massimiliano Caporin

  2. Department of Economics and Management, University of Padova, Padua, Italy

    Fulvio Fontini

  3. Department of Economics and Finance, LUISS University, Rome, Italy

    Paolo Santucci de Magistris

  4. CREATE, Aarhus University, Aarhus, Denmark

    Paolo Santucci de Magistris

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  1. Massimiliano Caporin
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  2. Fulvio Fontini
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  3. Paolo Santucci de Magistris
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Correspondence to Massimiliano Caporin.

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We would like to thank Cosimo Campidoglio and Marco Molini of Gestore Mercato Elettrico, for their help with data downloading and Mauro Bernardi for providing us with the code for the estimation of the cyclical patterns of electricity prices. A previous version, related to this work, titled “Price convergence within and between the Italian electricity day-ahead and dispatching services” was presented at MAF2018 International Conference on Mathematical and Statistical Methods for Actuarial Sciences and Finance in Madrid, University Carlos III. The authors are the only responsible for what is written here.

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Caporin, M., Fontini, F. & Santucci de Magistris, P. The long-run relationship between the Italian day-ahead and balancing electricity prices. Energy Syst 13, 111–136 (2022). https://doi.org/10.1007/s12667-020-00392-x

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