Competition in the Italian electricity market: The unforeseen social welfare losses of reform

The worldwide wave of reforms investing power industry has created new challenges to both supply demand side management. After deregulation, electric utilities restructured their operations from vertically integrated mechanisms to open market systems in order to establish a new competitive sector. Reform has involved also the Italian power sector, but competition, as largely shown by the empirical literature particularly in the first years of reform, has been far to be reached, and the electricity markets has been characterized by conditions of oligopoly and exercise of market power. This paper aims to analyze welfare loss and deviation from the competitive equilibrium recorded in the day ahead Italian electricity market after the first wave of reforms was almost implemented. The study presents a theoretical and empirical model to construct a competitive equilibrium, estimating market power, both, on the supply and demand sides of the day ahead electricity market. Results show the effect of non-competitive equilibriums simulation for the hourly markets in the period 2013-2014. In an ideal competitive market, prices would be lower than historical prices by about 2-5% and quantities would be higher by about 0.5-1%. From a quantitative perspective, results suggest a limited exercise of market power. The low deviations from the competitive equilibrium lead to positively judge the new market design. Nevertheless, as the electricity market is a dynamic environment, this study aims to provide a methodological framework to monitor competition and efficiency in a market that constantly evolves both from a technological and a regulatory perspective.