Spatial merit order effects of renewables in the Italian power exchange

Estimating the merit order effect of renewable energy sources provides key information inputs in several domains, notably in the design of green energy policies. Given the spatial nature of electricity supply and demand, it is important to disentangle the direct effect of renewables on zonal electricity prices from spatial spillovers. In this paper, we estimate spatial econometric models of the Italian zonal electricity prices, using IPEx daily average prices in the time window 2009–2015, for 6 market zones. The best specification is a spatial Durbin model including wind power, solar power, and hydropower production, as well as control variables. The model is estimated under different assumptions on the spatial-weighting matrix and in 3 sub-periods. Direct and indirect merit order effects are found stronger over time, especially for wind power; but the estimated merit order effect is smaller than in non-spatial models, suggesting that our analysis is capable of accounting for spatial spillovers.