Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 28/2004: Electricity prices in a mixed thermal and hydropower system

Michael Hoel ()
Additional contact information
Michael Hoel: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway

Abstract: When a monopolistic hydro producer interacts with a competitive thermal fringe, the short-run revenue function of the hydro monopolist is non-concave. This implies that even if the demand function is stationary, equilibrium prices may fluctuate through the year. For given capacities, both hydro and thermal producers are better off under such an outcome than under the competitive outcome with constant prices, while consumers are worse off. Prices may fluctuate through the year also in the long-run equilibrium where capacities are endogenous. In such an equilibrium the hydropower monopoly will get a lower profit than it would have gotten had it been a price taker.

Keywords: Electricity prices; Hydropower

JEL-codes: L12; L13; L94; Q25

31 pages, November 29, 2004

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