Inflow shortages in deregulated power markets — Reasons for concern?

In many countries hydropower constitutes a large share of the electricity producing capacity. In the earlier regulated electricity markets, production capacities exceeded demand due to security of supply concerns. The present deregulated markets base investments upon profitability alone, and security of supply issues are claimed to be less important. Market operators trust the pricing mechanism in competitive markets to clear. Then low inflow constitutes a less problem. Several markets, both under regulated and deregulated regimes, have faced serious droughts. Some of them have experienced problems with market clearance (Chile, Brazil, California) while other markets functioned well (The Nordic market). Important features to the market response are the flexibility of demand, the pattern of inflow shortage, the storage capacities, the possibility of trade between regions with different production technologies, and the market design and concentration. We apply an empirical based market model to simulate the effects under two inflow shortage scenarios in an international market with combined hydro and thermal capacities and restricted transmission capacities. We compare the scenarios with actual events and show that the model and the real market outcome are comparable. The simulations do not reveal any problems with the functioning of the market, which should calm down the anxiousness about security of supply in deregulated markets with stochastic energy supply.