Forecasting Italian electricity zonal prices with exogenous variables

In the last few years we have observed the deregulation in electricity markets and an increasing interest in price dynamics has been developed especially to consider all stylized facts shown by spot prices. Only few papers have considered the Italian Electricity Spot market since it has been deregulated recently. Therefore, this contribution is an investigation with emphasis on price dynamics accounting for technologies, market concentration, congestions and volumes. We aim to understand how these four variables affect zonal prices since these ones combine to bring about the single national price (prezzo unico d'acquisto, PUN). Hence, understanding its features is important for drawing policy indications referred to production planning and selection of generation sources, pricing and risk-hedging problems, monitoring of market power positions and finally to motivate investment strategies in new power plants and grid interconnections. Implementing Reg-ARFIMA-GARCH models, we assess the forecasting performance of selected models showing that they perform better when these factors are considered.

► We modeled electricity prices by fractionally integrated processes. ► We found significant relations between zonal spot prices and exogenous variables. ► We used forecasted volumes and a scenario analysis to get day-ahead forecasts. ► ARFIMA models with exogenous variables over-performed simple ARFIMA models.