Hydroeletric Generators Competing in Cascades

Rodrigo Menon Moita and Daniel Monte

Revista Brasileira de Economia - RBE, 2020, vol. 74, issue 1

Abstract: Hydroelectric generation is the main source of energy production in manycountries. When firms operate in the same river, or in cascades, the outputof an upstream firm is the input of its downstream rival. We build a dynamicstochastic duopoly model of competition in cascades and show that thedecentralized market is inefficient when rain is frequent. However, at the critical times when rain is infrequent the market allocation isefficient. In an extension of our benchmark model, we show that regulatory intervention might be necessary if peak prices are sufficiently higher than off-peak prices. In such cases, upstream firms delay production in off-peak times, limiting their rivaldownstream generators' production in peak times.

Date: 2020
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