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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.

Suggested Citation

  • Soledad Arellano, 2004. "Market Power in Mixed Hydro-Thermal Electric," Documentos de Trabajo 187, Centro de Economía Aplicada, Universidad de Chile.
  • Handle: RePEc:edj:ceauch:187
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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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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. 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 531-546, May.
    4. Nesbakken, Runa, 1999. "Price sensitivity of residential energy consumption in Norway," Energy Economics, Elsevier, vol. 21(6), pages 493-515, December.
    5. Bergman, Lars & Andersson, Bo, 1995. "Market Structure and the Price of Electricity: An ex ante Analysis of the deregulated Swedish Electricity Market," SSE/EFI Working Paper Series in Economics and Finance 47, Stockholm School of Economics.
    6. 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.
    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. 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.
    2. repec:eee:enepol:v:114:y:2018:i:c:p:566-577 is not listed on IDEAS
    3. Lykidi, Maria & Gourdel, Pascal, 2015. "How to manage flexible nuclear power plants in a deregulated electricity market from the point of view of social welfare?," Energy, Elsevier, vol. 85(C), pages 167-180.
    4. M. Soledad Arellano & Pablo Serra, 2005. "Market Power in Price-Regulated Power Industries," Documentos de Trabajo 208, Centro de Economía Aplicada, Universidad de Chile.
    5. repec:eee:energy:v:132:y:2017:i:c:p:171-185 is not listed on IDEAS
    6. 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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