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Market Power in Mixed Hydro-Thermal Electric

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  • Soledad Arellano

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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    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. Pascal Gourdel & Maria Lykidi, 2014. "The optimal short-term management of flexible nuclear plants in a competitive electricity system as a case of competition with reservoir," Post-Print halshs-01053474, HAL.
    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. Pascal Gourdel & Maria Lykidi, 2014. "How to manage a large and flexible nuclear set in a deregulated electricity market from the point of view of social welfare?," Documents de travail du Centre d'Economie de la Sorbonne 14059, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    6. 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.
    7. Pascal Gourdel & Maria Lykidi, 2014. "The inter-temporal optimization of the operation of the nuclear fuel reservoir in a liberalized electricity market dominated by the nuclear generation," Post-Print halshs-01053476, HAL.
    8. Lykidi, Maria & Gourdel, Pascal, 2017. "Optimal management of flexible nuclear power plants in a decarbonising competitive electricity market: The French case," Energy, Elsevier, vol. 132(C), pages 171-185.
    9. Pascal Gourdel & Maria Lykidi, 2014. "The optimal short-term management of flexible nuclear plants in a competitive electricity system as a case of competition with reservoir," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01053474, HAL.
    10. Faisal Mehmood Mirza & Olvar Bergland, 2016. "Market Power in the Norwegian Electricity Market: Are the Transmission Bottlenecks Truly Exogenous?," The Energy Journal, , vol. 37(2), pages 27-44, April.
    11. Pascal Gourdel & Maria Lykidi, 2014. "How to manage a large and flexible nuclear set in a deregulated electricity market from the point of view of social welfare?," Post-Print halshs-01053480, HAL.
    12. Alexander Galetovic & Juan Ricardo Inostroza & Cristián Marcelo Muñoz, 2004. "Gas y Electricidad: ¿qué hacer ahora? (Gas and electricity: What should we do now?)," Documentos de Trabajo 198, Centro de Economía Aplicada, Universidad de Chile.
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    15. Pascal Gourdel & Maria Lykidi, 2014. "How to manage a large and flexible nuclear set in a deregulated electricity market from the point of view of social welfare?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01053480, HAL.
    16. Pascal Gourdel & Maria Lykidi, 2014. "The inter-temporal optimization of the operation of the nuclear fuel reservoir in a liberalized electricity market dominated by the nuclear generation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01053476, HAL.
    17. Reus, Lorenzo & Munoz, Francisco D. & Moreno, Rodrigo, 2018. "Retail consumers and risk in centralized energy auctions for indexed long-term contracts in Chile," Energy Policy, Elsevier, vol. 114(C), pages 566-577.
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