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Hydropower Economics

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Abstract

The key question in hydropower production is the time pattern of the use of the water in the reservoir. The water used to produce electricity today can alternatively be used tomorrow. The analysis of the operation of hydropower is therefore essentially a dynamic one. The paper introduces some basic models for social allocation of stored water over discrete time periods using non-linear programming assuming capacities of generation and transmission as given. Implications of constraints such as limited storage capacity and limited connector capacity for (international) trade are studied. Results are derived for water allocation and development of the electricity price over time. Graphical illustrations are provided in the two- period case and successive pairs of periods in a multi-period setting by means of the bathtub diagram. Thermal capacity is added to hydro and the optimal mix is studied. The walls of the hydro bathtub are extended endogenously by thermal capacities. Finally, the case of monopoly is studied.Different from standard monopoly behaviour of contracting output, if total available water is to be used, the strategy of a monopolist is to redistribute the use of water for electricity production over periods compared with the social optimal distribution.

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  • Førsund, Finn R., 2005. "Hydropower Economics," Memorandum 30/2005, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2005_030
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    References listed on IDEAS

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    1. Severin Borenstein & James Bushnell & Christopher R. Knittel, 1999. "Market Power in Electricity Markets: Beyond Concentration Measures," The Energy Journal, , vol. 20(4), pages 65-88, October.
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    6. 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.
    7. Stein W. Wallace & Stein-Erik Fleten, 2002. "Stochastic programming in energy," GE, Growth, Math methods 0201001, University Library of Munich, Germany, revised 13 Nov 2003.
    8. Tjalling C. Koopmans, 1957. "Water Storage Policy in a Simplified Hydroelectric System," Cowles Foundation Discussion Papers 26, Cowles Foundation for Research in Economics, Yale University.
    9. James Bushnell, 2003. "A Mixed Complementarity Model of Hydrothermal Electricity Competition in the Western United States," Operations Research, INFORMS, vol. 51(1), pages 80-93, February.
    10. Crampes, C. & Moreaux, M., 2001. "Water resource and power generation," International Journal of Industrial Organization, Elsevier, vol. 19(6), pages 975-997, May.
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    1. Karhinen, Santtu & Huuki, Hannu, 2020. "How are the long distances between renewable energy sources and load centres reflected in locational marginal prices?," Energy, Elsevier, vol. 210(C).
    2. Mendes, Carlos André B. & Beluco, Alexandre & Canales, Fausto Alfredo, 2017. "Some important uncertainties related to climate change in projections for the Brazilian hydropower expansion in the Amazon," Energy, Elsevier, vol. 141(C), pages 123-138.

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    Keywords

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    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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