Hydropower Production Strategies: Impacts on Emissions and Windfall Profits

Abstract

Earlier literature clearly shows potential for, and realized abuses of, market power in deregulated electricity markets. Markets with a significant role of hydropower stations are susceptible to the abuse of market power. In this paper we utilize a long-run oriented Real-Time Price based simulation model to analyze the strategic behavior of hydropower producers in the Nordic electricity market framework. We show through different scenarios how different hydropower production strategies affect total annual energy consumed, prices, and capacity structure. We also show the relation between different strategies and emissions, costs and windfall profits. There seems to be no superior scenario under which all socially desirable goals are achieved as there is a clear tradeoff between allowing high windfall profits with highest cost efficiency and achieving the target for lower emissions.

Keywords: Strategic hydropower, Real-Time Pricing, CO2 emissions, Windfall profits

JEL Classification: C63, D22, D24, L11, L94, Q41