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

• Published in: Energy systems (Berlin. Periodical) Vol. 13; no. 1; pp. 111 - 136
• Main Authors: Caporin, Massimiliano, Fontini, Fulvio, Santucci de Magistris, Paolo
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer Berlin Heidelberg 01.02.2022; Springer Nature B.V
• Subjects: Balancing; Convergence; Economics and Management; Electricity pricing; Energy; Energy Policy; Energy Systems; Operations Research/Decision Theory; Optimization; Original Paper; Prices; Time series; Zonal prices; Price convergence; C32; Long-run equilibrium; Balancing prices; Fractional cointegration; Q40; C51; Q41
• ISSN: 1868-3967; 1868-3975
• DOI: 10.1007/s12667-020-00392-x

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.