Markets for Carbon and Power Pricing in Europe
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Markets for Carbon and Power Pricing in Europe

Theoretical Issues and Empirical Analyses

Edited by Francesco Gullì

Why do power prices seem to be correlated with the carbon price in some markets and not in others? This crucial question is at the centre of Francesco Gullì’s enlightening book, through which the contributing authors investigate a number of related issues. In particular, they explore why power firms are not consistent in passing-through into power prices the opportunity cost of carbon. They also examine the relationship between the pass-through mechanism and the structure of the power market.
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Chapter 8: The Impact of the European Emissions Trading Scheme on Power Prices in Italy: The ‘Load Duration Curve Approach’

Liliya Chernyavs’ka and Francesco Gullì


Liliya Chernyavs’ka and Francesco Gullì INTRODUCTION 8.1 The extent to which carbon price is passed through into power prices is one of the main questions concerning the impact of the EU ETS (European Emissions Trading Scheme) on the electricity sector. Nevertheless, the empirical literature does not provide clear enough answers to this question. Some authors argue in favour of a full (or almost full) pass-through.1 Others find that the CO2 costs have apparently not been fully passed into power prices2 or that there is limited evidence that CO2 is factored into the wholesale price.3 In this chapter we attempt to provide a further contribution in this field by estimating the impact of the EU ETS on power pricing in Italy. For this purpose, we use a heterodox methodology, the ‘load duration curve approach’, which allows us to examine how the pass-through varies continuously over time (that is, how it is dependent on the level of power demand). The chapter proceeds as follows. Section 8.2 describes the main structural features of the Italian power market. Section 8.3 applies the theoretical model to simulate the pass-through rate in Italy.4 Section 8.4 sets out the empirical analysis in the Italian context. The load duration curve approach will be used in order to check how well the observed pass-through curves match the estimated ones. Finally, Section 8.5 summarizes the main results of the analysis. 8.2 THE ITALIAN MARKET The Italian market is a highly concentrated context in which Enel, the dominant firm, exerts a...

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