The effect of a new power interconnector on energy prices volatility: the case of Sicily

TL;DR

This study examines how the Sorgente-Rizziconi interconnector affected Sicily's electricity price volatility, finding it increased volatility without lowering average prices, emphasizing the complex effects of infrastructure on energy markets.

Contribution

It provides the first empirical analysis of the interconnector's impact on price volatility using advanced semi-parametric and non-parametric models.

Findings

Price volatility in Sicily increased significantly after interconnector commissioning.

Average electricity prices in Sicily remained unchanged.

No significant effects observed in other Italian regions.

Abstract

Integrating energy islands into the European electricity market is a key challenge for the energy transition. This study investigates the impact of the Sorgente-Rizziconi interconnector on electricity price volatility in Sicily. Before its commissioning on 28 May 2016, the Sicilian electricity market zone was poorly interconnected with the Italian mainland. Using daily data from 2015 to 2018, the analysis applies a semi-parametric GARCH model with a logistic intervention function to estimate changes in conditional price variance. A fully non-parametric additive model is employed as a robustness check, allowing the data to shape volatility dynamics without imposing a predefined structure. The results reveal that the new interconnector significantly increased price volatility in Sicily, without reducing average price levels. No significant effects were observed in other Italian market zones. These findings highlight the context-dependent nature of infrastructure impacts and suggest that physical integration alone does not guarantee price stability. The results have important implications for energy policy, investment planning, and risk management in electricity markets.