Overview

Over the last two decades, an increasing number of countries around the world has replaced vertical integration with markets as the main methods of organizing the electricity and natural gas industries. This course discusses the way in which these markets have put economic principles into practice and provides insights on the topics that are currently on the frontier of research and at the heart of the policy agenda.

Specifically, there are some key questions in the design of these markets that deserve attention. First is how to set the price of energy; second, to what extent (and how) prices should include transmission/transportation effects; third, how are the necessary balancing resources procured; and fourth, how are environmental externalities accounted for. Examples of current topics in the electricity sector include how markets raise peak prices to pay for production capacity and if (and how) consumers should respond to price signals. 

Contents

1. Course introduction

Electricity and natural gas supply chains. European energy directives and current market structure. Unbundling and independent authorities.

2. Electricity markets

Wholesale market equilibrium. Transmission constrained market equilibrium. The Italian Power Exchange: Unique Purchasing Price. Bilateral contracts. Physical Transmission Rights. Ancillary services procurement. Market integration.

3. Natural gas markets

International scenario and market fundamentals. Wholesale natural gas markets. Long term contracts. Spot markets. Hubs. Hubs prices versus long term prices. Balancing market. Transportation tariff regulation.

4. Environmental issues

Emissions as negative externalities Private solutions to externalities: bargaining (Coase theorem). Public solutions to externalities: Environmental regulations. Applications: EU ETS. Renewables policies.

5. Advanced topics

Capacity markets. Demand response.  

Tutorial sessions

Tutorial sessions are a fundamental part of the course. Students will be divided in teams and engage in a simulation game (Electricity Market Simulation Game, EMSG) that will last several weeks. Each one the teams participating in the EMSG will be required to write an essay discussing their strategic choices.

Credits for this course will be assigned on the basis of a final, written examination.

As for students participanting in the tutorials, the course evaluation will be based also on the score obtained in the written essay.