Risk Management in Commodity Markets: From Shipping to Agriculturals and Energy

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Incentives for Investing in Renewables

Paolo Falbo, Daniele Felleti and Silvana Stefani

8.1 INTRODUCTION AND BACKGROUND

Electricity markets, once strongly characterized by direct government intervention and frequently implemented by vertically integrated public enterprises, have been subjected to radical transformation throughout the world. Reforms have introduced a new institutional framework intended to ease competitive entry, to provide incentives to efficiency in the generation, transmission, distribution and retailing of output, and also to reduce tariffs and allow direct access to producers to the market. Within this new industrial framework and as a result of the relevant pressure originating from social, economic and political issues, an efficient electricity generation portfolio mix is becoming a strategic issue for all power producers (probably, the strategic issue). The matter is particularly important for Italy, where the demand for energy continues to rise ahead of the European average, and undercapacity has driven prices higher than those seen in other major European countries. This motivates research into the impact of Renewable Energy Sources (RES) on current portfolio mix, which at present is based, at least in Italy, mainly on fossil fuels. From an economic perspective, RES offer an important diversification opportunity as their marginal costs are negligible. This leads us to consider wind as a key renewable source to be analyzed next to more traditional fuels ...