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Long-term contracting in hydro-thermal electricity generation: Welfare and environmental impact

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  • Billette de Villemeur, Etienne
  • Vinella, Annalisa

Abstract

We consider electricity generation industries where thermal operators imperfectly compete with hydro operators that manage a (scarce) water stock stored in reservoirs over a natural cycle. We explore how the exercise of intertemporal market power affects social welfare and environmental quality. We show that, as compared to the outcome of spot markets, long-term contracting either exacerbates or alleviates price distortions, depending upon the consumption pattern over the water cycle. Moreover, it induces a second-order environmental effect that, in the presence of a thermal competitive fringe, is critically related to the thermal market shares in the different periods of the cycle. We conclude by providing policy insights.

Suggested Citation

  • Billette de Villemeur, Etienne & Vinella, Annalisa, 2011. "Long-term contracting in hydro-thermal electricity generation: Welfare and environmental impact," Utilities Policy, Elsevier, vol. 19(1), pages 20-32, January.
    • Handle: RePEc:eee:juipol:v:19:y:2011:i:1:p:20-32
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    Cited by:

    1. David BENATIA & Etienne BILLETTE de VILLEMEUR, 2019. "Strategic Reneging in Sequential Imperfect Markets," Working Papers 2019-19, Center for Research in Economics and Statistics.
    2. Etienne Billette de Villemeur and Pierre-Olivier Pineau, 2016. "Integrating Thermal and Hydro Electricity Markets: Economic and Environmental Costs of not Harmonizing Pricing Rules," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    3. Robles, Jack, 2016. "Infinite horizon hydroelectricity games," Working Paper Series 5075, Victoria University of Wellington, School of Economics and Finance.
    4. Wu, Xin-wang & Zhu, Quan-tao & Sun, Laixiang, 2012. "On equivalence between Cournot competition and the Kreps–Scheinkman game," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 116-125.
    5. Zeng, Ming & Yang, Yongqi & Fan, Qiannan & Liu, Yingxin & Zou, Zhuojun, 2015. "Coordination between clean energy generation and thermal power generation under the policy of “direct power-purchase for large users” in China," Utilities Policy, Elsevier, vol. 33(C), pages 10-22.

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    More about this item

    Keywords

    Hydropower Thermal power Water allocation Environmental externalities Long-term contracts;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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