Risk Aversion and Dynamic Games between Hydroelectric Operators Under Uncertainty

CREATE Working Paper 2014-4

35 Pages Posted: 11 Jun 2014

See all articles by Abdessalem Abbassi

Abdessalem Abbassi

University of Carthage

Ahlem Dakhlaoui

Polytechnic School of Tunisia; University of Carthage

Lota D. Tamini

Université Laval

Date Written: June 9, 2014

Abstract

This article analyses management of hydropower dams within monopolistic and oligopolistic competition and when hydroelectricity producers are risk averse and face demand uncertainty. In each type of market structure we analytically determine the water release path in closed-loop equilibrium. We show how a monopoly can manage its hydropower dams by additional pumping or storage depending on the relative abundance of water between different regions to smooth the effect of uncertainty on electricity prices. In the oligopolistic case with symmetric risk aversion coefficient, we determine the conditions under which the relative scarcity (abundance) of water in the dam of a hydroelectric operator can favor additional strategic pumping (storage) in its competitor’s dams. When there is asymmetry of the risk aversion coefficient, the firm’s hydroelectricity production increases as its competitor’s risk aversion increases, if and only if the average recharge speed of the competitor’s dam exceeds a certain threshold, which is an increasing function of its average water inflows.

Keywords: Closed-loop Cournot competition, electricity wholesale market, hydropower dams, demand uncertainty, asymmetric risk aversion

JEL Classification: L94, Q25, C61, C73

Suggested Citation

Abbassi, Abdessalem and Dakhlaoui, Ahlem and Tamini, Lota D., Risk Aversion and Dynamic Games between Hydroelectric Operators Under Uncertainty (June 9, 2014). CREATE Working Paper 2014-4, Available at SSRN: https://ssrn.com/abstract=2447666 or http://dx.doi.org/10.2139/ssrn.2447666

Abdessalem Abbassi

University of Carthage ( email )

Tunis
Tunisia

Ahlem Dakhlaoui

Polytechnic School of Tunisia ( email )

La Marsa, Tunisia
France

University of Carthage ( email )

Tunis
Tunisia

Lota D. Tamini (Contact Author)

Université Laval ( email )

2214 Pavillon J-A. DeSeve
Quebec, Quebec G1K 7P4
Canada

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