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Market Power in Mixed Hydro-Thermal Electric Systems

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  • M. 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. Its appealing as a tool is enhanced by 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 may result from the combination of a fluctuating market demand and capacity or transmission constraints that bind intermitently. 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

  • M. Soledad Arellano, 2004. "Market Power in Mixed Hydro-Thermal Electric Systems," Econometric Society 2004 Latin American Meetings 211, Econometric Society.
    • Handle: RePEc:ecm:latm04:211
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    File URL: http://repec.org/esLATM04/up.1095.1082040622.pdf
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    References listed on IDEAS

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    1. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
    2. Borenstein, Severin & Bushnell, James & Kahn, Edward & Stoft, Steven, 1995. "Market power in California electricity markets," Utilities Policy, Elsevier, vol. 5(3-4), pages 219-236.
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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. 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.
    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. 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.
    6. Pittman, Russell, 2007. "Restructuring the Russian electricity sector: Re-creating California?," Energy Policy, Elsevier, vol. 35(3), pages 1872-1883, March.
    7. Francisco Caravia & Eduardo Saavedra, 2005. "Subastando la Energía para Clientes Regulados: Un Análisis de Equilibrio," ILADES-UAH Working Papers inv169, Universidad Alberto Hurtado/School of Economics and Business.
    8. 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.
    9. 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.

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    More about this item

    Keywords

    Utilities; Market Power; Scheduling of Hydro-Reservoirs.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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