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

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  • Finn R. Førsund

    ()

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.

Suggested Citation

  • Finn R. Førsund, 2006. "The Anatomy of Market Power in Electricity Markets with Hydropower as Dominating Technology," ICER Working Papers 21-2006, ICER - International Centre for Economic Research.
  • Handle: RePEc:icr:wpicer:21-2006
    as

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    File URL: http://www.biblioecon.unito.it/biblioservizi/RePEc/icr/wp2006/ICERwp21-06.pdf
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    References listed on IDEAS

    as
    1. Stefan Ambec & Joseph Doucet, 2003. "Decentralizing hydro power production," Canadian Journal of Economics, Canadian Economics Association, vol. 36(3), pages 587-607, August.
    2. 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.
    3. Crampes, C. & Moreaux, M., 2001. "Water resource and power generation," International Journal of Industrial Organization, Elsevier, vol. 19(6), pages 975-997, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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