MEASURING MARKET POWER IN WHOLESALE ELECTRICITY ITALIAN MARKET

In the new deregulated competitive Italian electric power market many competitive entities with different goals have replaced the old centralized decision making of the monopolistic environment. In this new contest many interesting issues arise as the market complexity, the firm strategic behavior, the market power size, and so on. Similar to other countries (Newbery, 2005), the Italian market has been organized as a sequence of a dayahead market, an adjustment market and a despatching resource market (Ancillary services market). The first market yields a system marginal price for each zone in which the market is separated due to network congestion (excess of physical transmission capacity), based on supply and demand bids. In the adjustment market, generators and loads submit offers/bids to correct parts of schedules which cannot be implemented due to technical constraints. Ancillary service market is a single market for procuring congestion relieve resources and for creating adequate secondary and tertiary control reserve margin. In this market resources are valued on a pay-as-bid basis. Other features of the market are: (i) in the period April – December 2004 only suppliers participated into the market, while demand was (inelastically) represented by the TSO; (ii) in January 2005 active demand bids entered in to the market, with the TSO being able to integrate bids if total market demand is “too different” from day-ahead forecast used for security management; (iii) in January 2005 the Single Buyer was instructed to use contract for differences (cfd) extensively and buy into the market. As a result, market liquidity rose to above 60%, due to Single Buyer dimension. (iv) Energy Authority enacted a market surveillance mechanism aimed at discouraging producers quantity withholding strategies, essentially “threatening” a “pay-as-bid” rather than “system marginal price” energy payment to a supplier, who withholds quantity aimed at exercising market power. In 2006, this provision was repealed due to a Court decision. The aim of this paper is twofold. The first one is to build a theoretical model of firm competitive behavior in the Italian electric market. The second aim is to construct the residual demand for each Italian Generation Company, in order to measure the unilateral market power for the Italian Generation Companies.