Price regimes in an energy island: Tacit collusion vs. cost and network explanations

Abstract

In this paper, we explore the determinants of wholesale electricity prices in an energy island such as Sicily, by estimating a regime switching model with timevarying transition probabilities on daily data in the 2012-2014 period. Explanatory variables used alternatively in the price equation and in the switching equation include power demand, the supply of intermittent renewables, the residual supply index, and a congestion indicator. Four competing hypotheses on the determinants of price regimes are tested (arbitrary market power, cost pro le, tacit collusion, congestion) in order to understand why, despite the general trend of declining prices induced by renewables in southern Italy, Sicilian prices stood high. The pattern of estimated coe cients is consistent with a tacit collusion story.