Demand market power and renewables in the Italian electricity market

Abstract We investigate whether there might exist some relationship between exercise of demand market power and renewable energy sources, in the Italian day ahead electricity market, using ex ante individual bids, in 2010–2011. We choose this period because we deem that is the initial period of booming renewable energy sources in Italy. We measure market power with the inverse of the hourly residual supply elasticity. Usage of bid data is a novelty in the literature, as previous studies have used ex post-market data. We consider the five main operators and we demonstrate that there exists demand market power, which can be empirically measured on average about 3–5% (statistically significant) in 2010, and higher, about 5–6%, in the 2011. As regard of the hours, we can find that the oligopsony market power is higher during daily hours than in the nightly hours. We show that this effect is significantly more pronounced during periods when there is abundance of renewable supply in the market.