A model of hourly electricity demand in the italian market

The Italian electricity market has been deregulated around 2004-05, but only recently there has been some empirical analysis of the demand side. A crucial issue is modeling the consumer behavior in the day-ahead market, where hourly bids are submitted for the entire 24 hour period of the following day, using consumer utility maximization, which is relevant for research about consumer behavior, market structure, as well as for guidance to the adoption of policy measure, ranging from taxation to welfare.  We pursue two objectives in this paper. The first one is to construct a model behavior of hourly electricity demand in the Italian market, taking into account the dual nature of substitutability and complementarity of electricity hourly usage. The second objective is to measure demand elasticity at hourly level, directly from consumer behavior. Using duality approach, in this paper we assume that for both residential and industrial consumers it is possible to postulate the existence of a multi-stage cost function: in the first stage there is usage  of electricity as a good “e” and a composite numerary good “y”, and in the second stage there is usage of  24 hourly electricity as goods “e_h”.

Following Bigerna (2012), we  provide a new attempt in the literature to estimate demand own and cross elasticity using a theoretically founded model on demand data, using demand bids data in the day-ahead market in the Italian Power Exchange (IPEX), from January 2005 to September 2011.

Econometric estimation allows to ascertain three main results: (i) there exists a well defined short run hourly electricity demand elasticity around -0.02; (ii) demand elasticity varies significantly with time of the day (it is different during peak hours w.r.t. to off peak hours), with seasonal patterns, with geographical location and with customer size; (iii) there exist some well defined cross elasticity among different hours of the day. These elasticity estimation show that hourly electricity consumption is both substitute and complement of other hourly consumption in the day. Using appropriate econometric estimation techniques we can ascertain that elasticity tends to be  generally higher when sudden hourly price shock are more pronounced. This means that appropriate regulation (discussed in the paper) can favor  consumer behavior adjustment shaving consumption away from peak  prices, thus yielding lower aggregate equilibrium expenditures, because consumers can shift more easily their consumption from peak price hours to off peak price.