Long-term contracting in hydro-thermal electricity generation: Welfare and environmental impact |
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Authors: | Etienne Billette de VillemeurAnnalisa Vinella |
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Affiliation: | a Toulouse School of Economics (IDEI and GREMAQ), Manufacture de Tabacs, 21 allée de Brienne - 31000 Toulouse, France b University of Bari, Department of Economics and Mathematics, via C. Rosalba 53 - 70124 Bari, Italy |
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Abstract: | We consider electricity generation industries where thermal operators imperfectly compete with hydro operators that manage a (scarce) water stock stored in reservoirs over a natural cycle. We explore how the exercise of intertemporal market power affects social welfare and environmental quality. We show that, as compared to the outcome of spot markets, long-term contracting either exacerbates or alleviates price distortions, depending upon the consumption pattern over the water cycle. Moreover, it induces a second-order environmental effect that, in the presence of a thermal competitive fringe, is critically related to the thermal market shares in the different periods of the cycle. We conclude by providing policy insights. |
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Keywords: | L13 L93 Q50 |
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