Estimating temperature effects on the Italian electricity market

This paper provides empirical evidence of the effects that weather conditions exert on the electricity market, offering a new contribution to the understanding of hourly regional price formation in the day ahead market in Italy. The empirical estimation uses a new data set of hourly data on both market variables and temperature variables. There is a vast body of literature on the effect of temperature on final consumers and on wholesale electricity market equilibrium. However, the influence of temperature on the behavior of the wholesale electricity market has not been studied at the hourly level. A new econometric estimation shows some evidence of different effects of temperature and provides a more accurate estimation of the hourly prices. Forecasting out-of-sample performance of the model is satisfactory. The present results have welfare-improving policy implications, because appropriate policy strategies can help public decision-makers promote regulation, such as issuing public weather alert and designing contingent plans to face extreme weather conditions, which improves production efficiency, network management, and consumer saving behavior, taking specific weather conditions into account.