Emerging issues in the european electricity market

We assess the impact of the European reform in the electricity market focusing on the effects of the First (96/92/EC) and the Second Directive (2003/54/EC). The contribution of the thesis is threefold. Firstly, we study the progress towards a single integrated EU market examining wholesale electricity price convergence in the main EU power exchanges. The key idea is if the underlying national markets are integrated, then there is evidence of a real integrated market. Thus, over the long run wholesale electricity prices should follow the same pattern. To establish wholesale price convergence we apply a fractional cointegration analysis developed by Granger. We find evidence of perfect cointegration between the German and the Austrian wholesale electricity markets. Secondly, we analyse the impact of the reform at retail level focusing on the effect on industrial consumer welfare. Specifically, we study the price-cost margins in the EU15 countries over the period 1980-2006. Our analysis examines the long-run equilibrium of achieving a single internal electricity market allowing Member States to converge freely to the steady state as established by the harmonization principle of the EU reform. Differently from previous studies, we apply the pooled mean group estimator developed by Pesaran et al. (1999), which constraints the long run parameters to be same, representing therefore the EU mandated goal of market integration, and allows different rates of adjustment to the equilibrium, representing harmonization. Empirical evidence shows that wholesale market opening, privatization and regulation result in an increase of industrial consumer welfare. However, as the degree of vertical integration decreases, price-cost margins increase shrinking industrial-consumer welfare. In addition, the analysis of national rates of adjustment to long-run equilibrium shows that Italy and Germany are the countries with the highest and lowest profit persistence respectively. Finally, we focus on the Italian wholesale market, specifically the Italian day-ahead market, to establish the progress towards competition after wholesale market opening, linking theoretical predictions and empirical findings to identify its underlying oligopolistic structure and to examine potential improvements in consumer welfare after market liberalization. Accounting for the zone organization of the Italian wholesale market, we study the two main macrozones North and South in the summer and winter months of 2005 and 2006. In each market, we define the set of the strategic players and price-taker firms according to both generation capacity and production. We then define two oligopolistic models to describe the underlying oligopolistic structure. In particular, in the North market, we compare the Stackelberg and the Cournot model, whereas, in the South, the Stackelberg and the Dominant firm model. To determine the coefficients of the strategic player’s residual demand, we first estimate the competitive fringe supply. We evaluate the oligopolistic market outcome according to optimization techniques. Applying a variation of the traditional coefficient of determination we find that the North market has recorded a change in the oligopolistic structure from the Stackelberg model (2005) to the Cournot model (2006). However, as stated by microeconomic theory this change implies a loss of efficiency. Concerning the South market results show that during weekdays, in both years, the market follows a Stackelberg model. Instead, during weekends the market has recorded a change from the Dominant firm model to the Stackelberg model.