The effects of renewables in space and time: A regime switching model of the Italian power price

Renewable energy production can exercise a downward pressure on electricity prices by partly crowding out conventional units characterized by higher marginal costs (merit order effect). Yet, congestion induced by renewables would partly offset the merit order effect in the congested zone, unless renewables reduce the need for imports and allow the emergence of prosumers. These congestion effects of renewables are hereby jointly tested with the merit order effect by means of an endogenous regime-switching model wherein a regime corresponds to the observable status (congested/non-congested) of the grid. The model is taken to data from the Italian power exchange, observed in 2012 and 2013, with a focus on the line connecting Sicily with the South zone, a frequent bottleneck in the Italian transmission grid. The results confirm the merit order effect previously detected in the literature and highlight a negative congestion effect, i.e. renewables relieve congestion from Sicily, a systematic importer, but not from the Italian peninsula (the exporting region). This effect is mainly driven by the wind power in-feed.