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Structural Analysis of Electricity Demand and Supply Interactions


  • This paper has been written during a period in which the first author was visiting the Energy Markets Group at London Business School. The support of the University of Bologna under the Marco Polo fellowship is gratefully acknowledged. We are grateful to the Editor and two anonymous referees for their useful comments which helped improving the quality of the paper. Many thanks also to Giuseppe Cavaliere, Michele Costa, Luca Fanelli, Attilio Gardini, Francesco Lisi, Stefano Sacchetto and the participants of the 29th Conference organized by the International Association of Energy Economists (IAEE) in Potsdam, to which an earlier version of the paper was presented.


We specify a structural asymmetric vector error-correction model to identify and estimate the demand and supply functions in hourly day-ahead wholesale electricity markets. In doing so, we provide, inter alia, new insights into a well-established but unresolved issue concerning the extent of the demand elasticity to price in these markets. We show that whilst demand appears to be inelastic in the short-run, the quantity traded on the market is significantly influenced by the price level and responds to previous disequilibria in the supply curve through an asymmetric error-correction mechanism, reacting to a positive disequilibrium but not to a negative one.