Identifying Bubbles in Electricity Prices during COVID-19: A Case Study of Italian Electricity Prices

Abstract

The main objective of this study is to identify whether there exists explosive behavior in Italian electricity prices or not by considering the data from January 2020 to December 2021. To achieve this, three econometric methods have been utilized which are developed to detect bubbles. These methods are: right tail Augmented Dickey Fuller (ADF) test, Sequential Augmented Dickey Fuller (SADF) test and generalized sup Augmented Dickey Fuller (GSADF) test. ADF test detected no explosive behavior in Italian electricity prices while both SADF and GSADF tests have revealed presence of explosive behavior in electricity prices. Further, SADF and GSADF tests identify specific periods of explosive behavior characterized by significant price fluctuations.

Several policy recommendations for solving this problem arise: introduce stabilizing price mechanisms; therefore, consumers may face stabilized unaffordable high rises and prices; on the other hand, one more method proposed is energy resource diversification, specifically on promotion renewable energy so people avoid usage of sources heavily volatile prices of fossils. In addition to these changes, the enhanced monitoring and regulatory capabilities in the market may help in providing fair competitiveness, transparent price, and avoidance of any kind of manipulation in the market. Additionally, demand supply management programs during peak periods of price volatility and long-term contracts would provide considerable stability and predictability, thereby creating favorable conditions both for producers and consumers.