Estimating welfare losses and gains in explicit auctions for power trade: an application to the Italian case

Cross-border transmission capacities in Europe have been traditionally allocated via explicit auctions. As these will be replaced by implicit auctions, a relevant question regards the impact of this major transition on expected gains in social welfare. In this paper we study, first, the equations that describe the welfare loss associated with a suboptimal use of the transmission capacity. Second, by examining how suboptimal flows, and particularly adverse flows, change with the introduction of implicit auctions, we derive an original procedure that improves the accuracy of the welfare loss estimation when available market data are limited. Finally, we apply the proposed procedure to data pertaining to the Italian market and verify that for a net importer, such as Italy, the procedure derived in this work is particularly helpful in providing more accurate estimations of the welfare losses associated with explicit auctions. As implicit auctioning will eliminate these welfare losses, we interpret our results as a measure of the benefits associated with the current transition for the Italian market and use them to derive some more general implications.