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Low natural gas prices and the financial cost of ramp rate restrictions at hydroelectric dams

Jordan D. Kern and Gregory W. Characklis

Energy Economics, 2017, vol. 61, issue C, 340-350

Abstract: Peaking hydroelectric dams that employ variable, stop-start reservoir releases can have adverse impacts on downstream river ecosystems. Efforts to mitigate these impacts have relied predominantly on the use of ramp rate restrictions, which limit the magnitude of hour-to-hour changes in reservoir discharge. Ramp rate restrictions shift hydropower production towards less valuable off-peak hours, imposing a financial penalty on dam owners that is a function of the “spread” (difference) between peak and off-peak electricity prices. This study examines how low natural gas prices in the U.S. have reduced the cost of implementing ramp rate restrictions at dams by narrowing the peak/off-peak price spread. Significantly lower costs of ramp rate restrictions could open new opportunities for improving environmental flows at dams, including the “purchase” of more natural streamflow patterns by downstream stakeholders, a type of arrangement for which there is growing precedent. We also explore the role that uncertainty in the cost of ramp rate restrictions could play in precluding downstream stakeholders from forming these types of agreements with dam owners. Results suggest that financial “collar” contracts could mostly eliminate inter-annual variability in the net cost of restrictions and provide those purchasing more natural flows with greater certainty.

Keywords: Natural gas prices; Electricity markets; Hydroelectric dams; Environmental impacts; Financial risk management (search for similar items in EconPapers)
JEL-codes: L93 Q41 Q25 Q57 C63 G22 (search for similar items in EconPapers)
Date: 2017
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