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Climate Policy and Strategic Operations in a Hydro-Thermal Power System

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Listed:
  • Farzad Hassanzadeh Moghimi
  • Hanna Ek Fälth
  • Lina Reichenberg
  • Afzal S. Siddiqui

Abstract

Decarbonisation of the Nordic power sector entails substantial variable renewable energy (VRE) adoption. While Nordic hydropower reservoirs can mitigate VRE output’s intermittency, strategic hydro producers may leverage increased flexibility requirements to exert market power. Using a Nash-Cournot model, we find that even the current Nordic power system could yield modest gains from strategic reservoir operations regardless of a prohibition on “spilling†water to increase prices. Instead, strategic hydro producers could shift generation from peak to offpeak seasons. Such temporal arbitrage becomes more attractive under a climate package with a €100/t CO2 price and doubled VRE capacity. Since the package increases generation variability, lowers average prices, and makes fossil-fuelled plants unprofitable, strategic hydro producers face lower opportunity costs in shifting output from peak to off-peak seasons and encounter muted responses from price-taking fossil-fuelled plants. Hence, a climate package that curtails CO2 emissions may also bolster strategic hydro producers’ leverage.

Suggested Citation

  • Farzad Hassanzadeh Moghimi & Hanna Ek Fälth & Lina Reichenberg & Afzal S. Siddiqui, 2023. "Climate Policy and Strategic Operations in a Hydro-Thermal Power System," The Energy Journal, , vol. 44(5), pages 67-94, September.
    • Handle: RePEc:sae:enejou:v:44:y:2023:i:5:p:67-94
    DOI: 10.5547/01956574.44.4.fmog
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    References listed on IDEAS

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    1. Tommi Ekholm and Vilma Virasjoki, 2020. "Pricing and Competition with 100% Variable Renewable Energy and Storage," The Energy Journal, International Association for Energy Economics, vol. 0(Special I).
    2. Jonas Egerer, 2016. "Open Source Electricity Model for Germany (ELMOD-DE)," Data Documentation 83, DIW Berlin, German Institute for Economic Research.
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