Hydro Power and Supply Function Equilibrium

Abstract

Much of the interest in the Supply Function Equilibria (SFE) model is focused on electricity spot markets for which it seems to be ideally suited. Most of the work has dealt with thermal power supply and very little with mixed hydro and thermal supply. The purpose of this paper is to explore the possibility of using the SFE model in markets with hydro power where power producers have water reservoirs that they use strategically. This concerns a wider type of markets where firms have inventories of goods that they can use strategically.