Federico BOFFA
Libera Università di Bolzano

Viswanth PINGALI
Northwestern University

Abstract: The Italian electricity market is divided into two geographic zones (north and south) and the inter-zonal transfer capacity is limited. During the peak demand periods, market-clearing prices are different across zones. During the low demand period, (when inter-zonal transfer capacity constraints are not met), no arbitrage condition ensures that prices are same across the two zones. We measure the effect on total surplus of new inter-zonal capacity that is sufficient to eliminate zonal pricing.
Using the current market data, we characterize the current market structure (with limited transfer capacity). Using these estimates we simulate the market under alternative market scenario (no transfer congestion).
We check whether .rms too, have an incentive to build inter-zonal transfer capacity. Our empirical results indicate that easing the transmission bottlenecks would result in substantial cost savings for the economy. We further .nd that the major .rm in the market (Enel) does not exercise the fullest extent of its market power.