Strategic Storage Use in a Hydro-Thermal Power System with Carbon Constraints

32 Pages Posted: 10 Feb 2020 Last revised: 28 Sep 2021

See all articles by Sébastien Debia

Sébastien Debia

HEC Montreal - Department of Decision Sciences

Pierre-Olivier Pineau

HEC Montreal - Department of Decision Sciences

Afzal Siddiqui

Stockholm University - Department of Computer and Systems Sciences; Aalto University - Department of Mathematics and Systems Analysis

Date Written: January 16, 2020

Abstract

Several interconnected power systems worldwide have largely thermal and hydro production along with carbon cap-and-trade (C&T) systems and variable renewable energy sources (VRES). C&T policies increase VRES generation, and socially optimal storage deployment could integrate VRES output. However, hydro reservoirs may be used strategically due to market power. We investigate these distortions and assess measures for their mitigation via a bottom-up equilibrium model of New York and Québec. In particular, we find evidence that hydro producers shift water between seasons to manipulate electricity prices even under a net-hydro production constraint. Alternative regulation covering net imports as well as net-hydro production limits such temporal arbitrage but enables firms with both thermal generation and pumped-hydro storage to exercise spatial arbitrage. We demonstrate that these distortions will be exacerbated under more stringent C&T policies because price-taking thermal producers are less able to respond to price signals.

Keywords: Hydro storage, Market power, Carbon policy, Renewable energy

JEL Classification: C7, D4, D6, L1, L94, Q4

Suggested Citation

Debia, Sébastien and Pineau, Pierre-Olivier and Siddiqui, Afzal, Strategic Storage Use in a Hydro-Thermal Power System with Carbon Constraints (January 16, 2020). Energy Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3520559 or http://dx.doi.org/10.2139/ssrn.3520559

Sébastien Debia

HEC Montreal - Department of Decision Sciences ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4
Canada

Pierre-Olivier Pineau

HEC Montreal - Department of Decision Sciences ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4
Canada

Afzal Siddiqui (Contact Author)

Stockholm University - Department of Computer and Systems Sciences ( email )

Stockholm
Sweden
164 07 (Fax)

Aalto University - Department of Mathematics and Systems Analysis ( email )

P.O. Box 11100
Helsinki, 00076
Finland

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