Inflow uncertainty in hydropower markets

Discussion Papers No. 520, October 2007 Statistics Norway, Research Department

Petter Vegard Hansen

Inflow Uncertainty in Hydropower Markets

Abstract:

In order to analyse the consequences of uncertainty for prices and efficiency in a hydropower system, we apply a two-period model with uncertainty in water inflow. We study three different market structures, perfect competition, monopoly and oligopoly and stress the importance of the shape of the demand function under different distributions of water inflow. The uncertainty element creates possibilities of exercising market power depending on the distribution of uncertainty among producers. The introduction of thermal power into the hydropower market has an impact on the residual demand function, which is important for the hydropower producers' possibilities of exercising market power.

Keywords: hydropower, uncertainty, electricity, thermal power, demand functions, monopoly, duopoly

JEL classification: D40, Q11, Q41, L10

Acknowledgement: I am very grateful to Nils-Henrik von der Fehr and Iulie Aslaksen for advice and helpful discussions. I also appreciate comments on drafts of this paper from Torstein Bye, Fridrik Baldursson, John Dagsvik, Torgeir Ericson, Finn Førsund, Terje Skjerpen and Kjetil Telle. Financial support from Nordic Energy Research, NEMIEC program, is gratefully acknowledged.

Address: Petter Vegard Hansen, Statistics Norway, Research Department. P.O.Box 8131 Dep., N- 0033 Oslo, Norway, Telephone: +47 21094956, E-mail: Petter.Vegard.Hansen@ssb.no

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