Market Power in Mixed Hydro-Thermal Electric Systems

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 usedUtilities; Market Power; Scheduling of Hydro-Reservoirs.