The long-run relationship between the Italian day-ahead and balancing electricity prices

We study the convergence of day-ahead and balancing prices for the Italian power market. The zonal time-series of the prices are evaluated, seasonally adjusted and tested to assess their long-run properties. We focus on the dynamic behavior of the four continental price zones of Italy (North, Central-North, Central-South and South). Using a sample of data that spans the last decade and applying the fractional cointegration methodology, we show the existence of long-run relationships. This signals the existence of convergence between prices in each zone but zone Central-South, where prices are divergent. We also measure the average price difference, and analyse how it evolves over time. Price differences dynamically reduce for all zones except for Central-South. We comment the results and provide an interpretation for the differences across zones. We also discuss policy consequences for both Italian and other markets.