Hydropower Production Profiles: Impacts on Capacity Structure, Emissions, and Windfall Profits

Production structure in markets with a significant role of hydropower is sensitive to the production profile of hydropower. In this paper we utilize a long-run oriented real-time price based simulation model to analyze through scenarios the impact of different hydropower production profiles on the total annual energy consumed, prices, and capacity structure. We also show the relation between different hydropower production profiles 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. 1. Introduction The role of energy as a driver of social and economic development is becoming more evident day by day. The negative externalities related to energy production and consumption govern political debates and decision making. The price of energy combined with low price elasticity raises the share of energy expenditures in household’s and firm’s budgets. These developments naturally emphasize the importance of properly functioning energy markets. The significance of hydropower production in hydro dominated regions is recognized by many authors (see, e.g., [1–5]). They point out that even a relatively small firm may have a significant impact on market outcome if demand is inelastic and capacity withdrawn from production has low variable costs which cannot be easily replaced by a production with similar variable costs. Hydropower production is very flexible in allocating water from reservoirs (including the impacts of weather conditions and varying yearly precipitation to the model are very demanding tasks excluded from this analysis; however, in the future our aim is to extend the model to include these aspects as well) and the variable costs of production are very low. The aggregate role of different hydropower production profiles has, however, to our knowledge, not been analyzed. The share of hydropower in Nordic power market is significant but there is also a mixture of other production technologies (nuclear, thermal power, wind power, gas turbines, etc.) present. These facts together offer a very good basis for this kind of analysis. Our study contributes to the existing literature by combining an economic value approach model [6–8] to different hydropower profiles in the Nordic power market. It has clearly been noticed in the literature that the potential for strategic behavior (market power) is susceptible in markets with a significant