Simplified Electricity Market Models with Significant Intermittent Renewable Capacity: Evidence from Italy
Using hourly offer curves for the Italian day-ahead market and the real-time re-dispatch market for the period January 1, 2017 to December 31, 2018, we show how thermal generation unit owners attempt to profit from differences between a simplified day- ahead market design that ignores system security constraints as well as generation unit operating constraints, and real-time system operation where these constraints must be respected. We find that thermal generation unit owners increase or decrease their day- ahead offer price depending on the probability that their final output will be increased or decreased because of real-time operating constraints. We estimate generation unit- level models of the probability of each of these outcomes conditional on forecast demand and renewable production in Italy and neighbouring countries. Our most conservative estimate implies an offer price increase of 50 EUR/MWh if the predicted probability of day-ahead market schedule increases from zero to one. If the predicted probability of a day-ahead market schedule increases from zero to one the unit owner’s offer price is predicted to be 60 EUR/MWh less. We find that these re-dispatch costs averaged approximately nine percent of the cost of wholesale energy consumed valued at the day-ahead price during our sample period.