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Properties of a non-competitive electricity market dominated by hydroelectric power

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  • Førsund, Finn R.

    (Dept. of Economics, University of Oslo)

  • Hoel, Michael

    (Dept. of Economics, University of Oslo)

Abstract

An important conclusion from the literature on hydropower is that if there are no other constraints than the available water reservoirs for a year, and operating costs are ignored, the competitive (and socially optimal) outcome is characterized by the (present value) price being constant through the year. A second important conclusion is that the outcome under monopoly generally will differ from this, provided that the demand functions differ across different days (or other sub-periods) of the year.We show that even if the demand function is the same all days of the year, the monopoly outcome will generally differ from the competitive outcome. The difference is caused by the profit function of a price-setting producer of hydropower being non-concave. This non-concavity can be caused by short-run capacity limits either on exports and imports of electricity, or on the supply of alternative electricity sources.

Suggested Citation

  • Førsund, Finn R. & Hoel, Michael, 2004. "Properties of a non-competitive electricity market dominated by hydroelectric power," Memorandum 07/2004, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2004_007
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    File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2004/Memo-07-2004.pdf
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    References listed on IDEAS

    as
    1. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, vol. 92(5), pages 1376-1405, December.
    2. Brian K. Edwards, 2003. "The Economics of Hydroelectric Power," Books, Edward Elgar Publishing, number 2244.
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    Cited by:

    1. Hipòlit Torró, 2007. "Forecasting Weekly Electricity Prices at Nord Pool," Working Papers 2007.88, Fondazione Eni Enrico Mattei.
    2. Russell Pittman & Vanessa Yanhua Zhang, 2010. "Electricity Restructuring In China: How Competitive Will Generation Markets Be?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 55(02), pages 377-400.
    3. Rangel, Luiz Fernando, 2008. "Competition policy and regulation in hydro-dominated electricity markets," Energy Policy, Elsevier, vol. 36(4), pages 1292-1302, April.
    4. Russell Pittman & Vanessa Yanhua Zhang, 2008. "Electricity Restructuring in China: The Elusive Quest for Competition," EAG Discussions Papers 200805, Department of Justice, Antitrust Division.
    5. Haddad, Mohamed S., 2011. "Capacity choice and water management in hydroelectricity systems," Energy Economics, Elsevier, vol. 33(2), pages 168-177, March.
    6. Hoel, Michael, 2004. "Electricity prices in a mixed thermal and hydropower system," Memorandum 28/2004, Oslo University, Department of Economics.

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    More about this item

    Keywords

    Electricity prices; Hydropower;

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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