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2004 Documento de Trabajo #187

Market Power in Mixed Hydro-Thermal Electric

This paper shows that, unlike what has been found in other papers, a hydro reservoir is an effective tool to exercise market power. Itsappealing as a tool is enhancedby 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 result from the combination of a fluctuating market demand and supply constraints that bind intermittently. 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 used.

M. Soledad Arellano

Keywords: Electric Utilities; Market Power; Scheduling of Hydro-Reservoirs.