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Market Power in Mixed Hydro-Thermal Electric

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  • 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. Itsappealing as a tool is enhancedby 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 result from the combination of a fluctuating market demand and supply constraints that bind intermittently. 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://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120040527143150.pdf
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    Bibliographic Info

    Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 187.

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    Date of creation: 2004
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    Handle: RePEc:edj:ceauch:187

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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.
    2. von der Fehr, Nils-Henrik Morch & Harbord, David, 1993. "Spot Market Competition in the UK Electricity Industry," Economic Journal, Royal Economic Society, vol. 103(418), pages 531-46, May.
    3. Bo Andersson & Lars Bergman, 1995. "Market Structure and the Price of Electricity: An Ex Ante Analysis of the Deregulated Swedish Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 97-110.
    4. Frank Wolak, 2000. "An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market," International Economic Journal, Taylor & Francis Journals, vol. 14(2), pages 1-39.
    5. Bergman, Lars & Andersson, Bo, 1995. "Market Structure and the Price of Electricity: An ex ante Analysis of the deregulated Swedish Electricity Market," Working Paper Series in Economics and Finance 47, Stockholm School of Economics.
    6. Nesbakken, Runa, 1999. "Price sensitivity of residential energy consumption in Norway," Energy Economics, Elsevier, vol. 21(6), pages 493-515, December.
    7. Donatos, George S. & Mergos, George J., 1991. "Residential demand for electricity: The case of Greece," Energy Economics, Elsevier, vol. 13(1), pages 41-47, January.
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    Cited by:
    1. M. Soledad Arellano & Pablo Serra, 2005. "Market Power in Price-Regulated Power Industries," Documentos de Trabajo 208, Centro de Economía Aplicada, Universidad de Chile.
    2. 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.

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