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Simplified Market Mechanisms with Significant Intermittent Renewable Capacity: Evidence from Italy

Image of Economic evaluation of the social benefits of district heating in Italy and Lombardy
Room 302 & Online
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Speaker: Christoph Graf (Stanford University and New York University School of Law)

Summary: We study the performance of simplified electricity market designs currently in place throughout Europe. Unlike the United States, Europe has not transitioned to a market design that rigorously accounts for grid constraints and other operational constraints. These constraints cannot be assumed away in real-time and therefore the system operator will need to correct unit-level day-ahead market schedules if these schedules are not compatible with a secure real-time operation of the power grid. Such a market mechanism can lead to what is called the INC/DEC game, where thermal generation unit owners systematically alter their offers into this simplified day-ahead market to increase the profits they earn from the energy they ultimately produce. Using hourly offer curves from 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 systematically alter their offers into this simplified day-ahead market to increase the profits they earn from the energy they ultimately produce. We find that the cost of these actions averaged approximately 15% of the total cost of energy consumption valued at the day-ahead price over our sample period and are likely to increase as the share of energy produced by intermittent renewable resources increases. We furthermore assess the performance of the market under a high stress period during the COVID-19 lockdown, which has reduced demand for electricity in Italy and Europe. The lockdown can provide insights about electricity market performance with a large share of renewables where little demand will be served by controllable generation units. We find that although the lockdown reduced average day-ahead prices in Italy by 45%, re-dispatch costs increased by 73%, both relative to the average of the same magnitude for the same period in previous years.

Links to (Working) Papers: Simplified Market Mechanisms for Non-Convex Markets: Evidence from Italian Electricity Market, (Machine) learning from the COVID-19 lockdown about electricity market performance with a large share of renewables

More info on Christoph Graf’s work here: https://chrisgraf.net/

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The seminar will also be on Zoom: