  The negative demand shock due to the COVID-19 lockdown has reduced net demand
for electricity -- system demand less amount of energy produced by intermittent
renewables, hydroelectric units, and net imports -- that must be served by
controllable generation units. Under normal demand conditions, introducing
additional renewable generation capacity reduces net demand. Consequently, the
lockdown can provide insights about electricity market performance with a large
share of renewables. We find that although the lockdown reduced average
day-ahead prices in Italy by 45%, re-dispatch costs increased by 73%, both
relative to the average of the same magnitude for the same period in previous
years. We estimate a deep-learning model using data from 2017--2019 and find
that predicted re-dispatch costs during the lockdown period are only 26% higher
than the same period in previous years. We argue that the difference between
actual and predicted lockdown period re-dispatch costs is the result of
increased opportunities for suppliers with controllable units to exercise
market power in the re-dispatch market in these persistently low net demand
conditions. Our results imply that without grid investments and other
technologies to manage low net demand conditions, an increased share of
intermittent renewables is likely to increase costs of maintaining a reliable
grid.
