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

  • de Villemeur, Étienne
  • Vinella, Annalisa

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.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 628.

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Date of creation: 13 Jul 2010
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Publication status: Published in Utilities Policy, vol.�19, n°1, janvier 2011, p.�20-32.
Handle: RePEc:ide:wpaper:22882
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  1. Rangel, Luiz Fernando, 2008. "Competition policy and regulation in hydro-dominated electricity markets," Energy Policy, Elsevier, vol. 36(4), pages 1292-1302, April.
  2. Johnsen, Tor Arnt, 2001. "Demand, generation and price in the Norwegian market for electric power," Energy Economics, Elsevier, vol. 23(3), pages 227-251, May.
  3. M. Soledad Arellano, 2004. "Market Power in Mixed Hydro-Thermal Electric Systems," Econometric Society 2004 Latin American Meetings 211, Econometric Society.
  4. Crampes, C. & Moreaux, M., 2001. "Water resource and power generation," International Journal of Industrial Organization, Elsevier, vol. 19(6), pages 975-997, May.
  5. Billette de Villemeur, Etienne & Pineau, Pierre-Olivier, 2010. "Environmentally damaging electricity trade," Energy Policy, Elsevier, vol. 38(3), pages 1548-1558, March.
  6. Apergis, Nicholas & Payne, James E., 2010. "Energy consumption and growth in South America: Evidence from a panel error correction model," Energy Economics, Elsevier, vol. 32(6), pages 1421-1426, November.
  7. Barnett, A H, 1980. "The Pigouvian Tax Rule under Monopoly," American Economic Review, American Economic Association, vol. 70(5), pages 1037-41, December.
  8. Soledad Arellano, 2004. "Market Power in Mixed Hydro-Thermal Electric," Documentos de Trabajo 187, Centro de Economía Aplicada, Universidad de Chile.
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