Increasing Market Interconnection: An analysis of the Italian Electricity Spot Market

Abstract

In this paper we estimate the benefits resulting from interconnecting the Italian electricity spot market. The market is currently divided into two geographic zones – North and South – with limited interzonal transmission capacity that often induces congestion, and hence potential inefficiency. By simulating a fully interconnected market, we predict that the total spot market expenditure would reduce substantially. Moreover, since savings do not increase linearly with the size of new transmission capacity, even a slight increment to transmission capacity is found to bring substantial benefits to end users. Finally, our analysis shows that the (partly State owned) dominant firm in the market is not maximizing short-term profits.Transmission constraints, zonal pricing, congestion, electricity industry