Increasing market interconnection: An analysis of the Italian electricity spot market

We estimate the benefits (in terms of savings to end-users) resulting from an improved interconnectivity in the Italian electricity spot market. The market is currently divided into two geographic zones - North and South - with limited inter-zonal transmission capacity that often induces congestion, and hence potential inefficiency. By simulating a fully interconnected market, we predict that the total spot market expenditure would reduce substantially. Moreover, since savings do not increase linearly with the size of new transmission capacity, even a slight increment to transmission capacity is found to substantially reduce end-users' expenditures. Finally, our analysis shows that the (partly State owned) dominant firm in the market is not maximizing short-term profits.