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The Anatomy of Market Power in Electricity Markets with Hydropower as Dominating Technology

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  • Finn R. Førsund

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Abstract

The problem of optimal management of a water reservoir by a hydropower producer is necessarily a dynamic one since water can be transferred between periods. A hydropower producer being a monopolist cannot reduce output in the classical way without spilling water. He will follow a strategy of setting marginal revenues equal between time periods and thus shift water from relatively inelastic periods to relatively elastic ones. If the monopolist has thermal capacity the strategy is the same, but the utilization of thermal capacity is reduced. If the monopolist has control over external trade import is reduced and export increased compared with the social solution. Technical constraints of limited reservoir and interconnector capacity and a competitive fringe may reduce markedly the consequences of exercising market power.

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File URL: http://www.icer.it/docs/wp2006/ICERwp21-06.pdf
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Bibliographic Info

Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 21-2006.

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Length: 35 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:icr:wpicer:21-2006

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Related research

Keywords: Hydropower; thermal power; market power; flexibility-corrected price; competitive fringe.;

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  1. Crampes, C. & Moreaux, M., 2001. "Water resource and power generation," International Journal of Industrial Organization, Elsevier, vol. 19(6), pages 975-997, May.
  2. Stefan Ambec & Joseph Doucet, 2003. "Decentralizing hydro power production," Canadian Journal of Economics, Canadian Economics Association, vol. 36(3), pages 587-607, August.
  3. 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.
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