Optimal installation of renewable electricity sources: the case of Italy

TL;DR

This paper evaluates Italy's renewable energy installation strategy from 2012 to 2018 using a stochastic model, comparing actual policies with the optimal strategy derived from a mathematical framework, and analyzing the impact on electricity prices.

Contribution

It extends the existing model to account for multiple producers and no impact on prices, providing a quantitative comparison between actual and optimal renewable installation strategies in Italy.

Findings

Photovoltaic energy impacts the North zone prices.

Wind energy significantly affects Sardinia prices.

The actual installation strategy deviates from the model's optimal plan.

Abstract

Starting from the model in Koch-Vargiolu (2019), we test the real impact of current renewable installed power in the electricity price in Italy, and assess how much the renewable installation strategy which was put in place in Italy deviated from the optimal one obtained from the model in the period 2012--2018. To do so, we consider the Ornstein-Uhlenbeck (O-U) process, including an exogenous increasing process influencing the mean reverting term, which is interpreted as the current renewable installed power. Using real data of electricity price, photovoltaic and wind energy production from the six main Italian price zones, we estimate the parameters of the model and obtain quantitative results, such as the production of photovoltaic energy impacts the North zone, while wind is significant for Sardinia and the Central North zone does not present electricity price impact. Then we implement the solution of the singular optimal control problem of installing renewable power production devices, in order to maximize the profit of selling the produced energy in the market net of installation costs. We extend the results of \cite{KV} to the case when no impact on power price is presented, and to the case when $N$ players can produce electricity by installing renewable power plants. We are thus able to describe the optimal strategy and compare it with the real installation strategy that was put in place in Italy.