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Pumping Water to Compete in Electricity Markets

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Pumping Water to Compete in Electricity Markets Claude Crampes∗and Michel Moreaux† February 7, 2008 ∗Toulouse School of Economics (GREMAQ and IDEI) [email protected] †Toulouse School of Economics and IUF (IDEI and LERNA) [email protected] Contents 1 Introduction 3 2 Model setting 5 3 Efficient production schemes 7 4 Integrated management 12 4.1 First best dispatch . . . . . . . . . . . . . . . . . . . . . . . . 12 4.2 The private monopoly . . . . . . . . . . . . . . . . . . . . . . 15 5 Cournot Competition 19 5.1 Energy pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.2 Sale obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.2.1 The instability of equilibria with hydrogeneration at the off-peak period . . . . . . . . . . . . . . . . . . . . 24 5.2.2 Equilibrium analysis . . . . . . . . . . . . . . . . . . . 26 5.3 Purchase obligation . . . . . . . . . . . . . . . . . . . . . . . . 29 5.3.1 Differences with the monopoly case . . . . . . . . . . . 29 5.3.2 Equilibrium analysis . . . . . . . . . . . . . . . . . . . 31 6 Conclusions 34 7 References 36 8 Appendix 37 1 Abstract The pump storage technique allows to use cheap thermal electricity at periods of low demand to restore water resources that can be used to generate electricity at periods of peak demand. When the thermal plant and the hydro plant are managed by the same operator, the two plants are used in an efficient way to substitute low cost fuel to high cost fuel. When there are two independent managers, competition requires careful analysis. The paper first analyses the optimal dispatch and the profit-maximizing dispatch of the thermal and hydro-generation units when water can be pumped up into reservoirs. We identify the demand and cost conditions where the pumping device must be used. We then switch to the case where the two plants are operated by separate owners. We analyse the Nash equilibrium of the game where the hydro unit is the client of the th

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