Cross-border power transmission capacities in Europe have been traditionally allocated via explicit auctions. As these will be replaced by implicit auctions, a relevant question regards the impact of this major change on expected gains in social welfare. In this paper we study, first, the equations that describe the welfare loss associated with a suboptimal use of the transmission capacities. Second, by examining how suboptimal flows, and particularly adverse flows, change with the introduction of implicit auctions, we derive an original procedure that improves the accuracy of the welfare loss estimation with available market data. Finally, we apply the proposed procedure to data pertaining to the Italian market and verify that for a net importer, such as Italy, the procedure derived in this work is particularly helpful in providing more accurate results than the usual estimations of the welfare losses associated with explicit auctions. As implicit auctioning will eliminate these welfare losses, we interpret our results as a measure of the benefits of the coupling of the Italian market with that of the neighboring countries and use them to derive some more general implications.
Estimating welfare losses and gains in explicit auctions for power trade: an application to the Italian case
DE PAOLI, LUIGI;
2013
Abstract
Cross-border power transmission capacities in Europe have been traditionally allocated via explicit auctions. As these will be replaced by implicit auctions, a relevant question regards the impact of this major change on expected gains in social welfare. In this paper we study, first, the equations that describe the welfare loss associated with a suboptimal use of the transmission capacities. Second, by examining how suboptimal flows, and particularly adverse flows, change with the introduction of implicit auctions, we derive an original procedure that improves the accuracy of the welfare loss estimation with available market data. Finally, we apply the proposed procedure to data pertaining to the Italian market and verify that for a net importer, such as Italy, the procedure derived in this work is particularly helpful in providing more accurate results than the usual estimations of the welfare losses associated with explicit auctions. As implicit auctioning will eliminate these welfare losses, we interpret our results as a measure of the benefits of the coupling of the Italian market with that of the neighboring countries and use them to derive some more general implications.
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