A System of Hourly Demand in the Italian Electricity Market

Abstract

The purpose of this paper is to analyze and test demand behavior in the organized electricity market. According to a theoretical framework of heterogeneous agents’ behavior, we estimate a complete multi-stage system weakly separable using individual demand bid data in the Italian Power Exchange. The novel contribution of this paper is twofold. Firstly, we model hourly demand of heterogeneous groups of agents acting in the Italian electricity market with a simultaneous system for all 24 hours. Secondly, we empirically measure the entire structure of expenditure elasticities and cross price elasticities for all 24 hours of the day, ascertaining whether hourly electricity demands can be considered normal or luxury goods and substitutes or complements in an organized electricity market. Econometric estimation shows that price elasticity tends to be higher when hourly price peak. Moreover, electricity exhibits both substitutability and complementarity characteristic in different hours of the day, the former during the day and the latter during the night. Electricity appears to be a normal good during nighttime and a luxury good during daytime. The demand structure has welfare improving policy implications, because appropriate regulation can favor consumer behavior adjustment to shave consumption away from peak prices, thus yielding lower aggregate equilibrium expenditures. To this end, we advocate reforming the actual administered two-price tariff structure to introduce real time pricing options for Italian final users.