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Market Power in Mixed Hydro-Thermal Electric Systems

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  • M. Soledad Arellano
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    Abstract

    This paper shows that, unlike what has been found in other papers, a hydro reservoir is an effective tool to exercise market power. Its appealing as a tool is enhanced by the fact that there is no need to constrain total hydro production - a practice too easy to detect -; it suffices to distort the intertemporal allocation of hydro production over time. A hydro-producer may increase his profits by exploiting differences in price elasticity of demand across periods, allocating too little supply to less elastic periods and too much to more elastic periods. Differences in price elasticity across periods may result from the combination of a fluctuating market demand and capacity or transmission constraints that bind intermitently. This hydro scheduling decision is only available to hydro producers as thermal generators are not able to "store electric power" and decide when to sell it. It is also shown that total hydro production is not a sufficient indicator of market power being exercised as hydro producers may exercise market power even when all the water available in the\reservoir is used. The real indicator of market power being exercised is the hydro scheduling strategy used

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    File URL: http://repec.org/esLATM04/up.1095.1082040622.pdf
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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 211.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:ecm:latm04:211

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    Related research

    Keywords: Utilities; Market Power; Scheduling of Hydro-Reservoirs.;

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    References

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    1. Borenstein, Severin & Bushnell, James & Kahn, Edward & Stoft, Steven, 1995. "Market power in California electricity markets," Utilities Policy, Elsevier, vol. 5(3-4), pages 219-236.
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    Cited by:
    1. Francisco Caravia & Eduardo Saavedra, 2005. "Subastando la Energía para Clientes Regulados: Un Análisis de Equilibrio," ILADES-Georgetown University Working Papers inv169, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
    2. M. Soledad Arellano & Pablo Serra, 2005. "Market Power in Price-Regulated Power Industries," Documentos de Trabajo 208, Centro de Economía Aplicada, Universidad de Chile.
    3. de Villemeur, Étienne & Vinella, Annalisa, 2010. "Long-term contracting in hydro-thermal electricity generation: welfare and environmental impact," IDEI Working Papers 628, Institut d'Économie Industrielle (IDEI), Toulouse.
    4. Pittman, Russell, 2007. "Restructuring the Russian electricity sector: Re-creating California?," Energy Policy, Elsevier, vol. 35(3), pages 1872-1883, March.
    5. Alexander Galetovic & Juan Ricardo Inostroza & Cristián Marcelo Muñoz, 2004. "Gas y Electricidad: ¿qué hacer ahora? (Gas and electricity: What should we do now?)," Documentos de Trabajo 198, Centro de Economía Aplicada, Universidad de Chile.

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