Abstract
Low electricity prices put economic pressure on hydropower companies. A more flexible water fee design can counteract this pressure and support hydropower companies during times when market revenues are low. However, this comes at the cost of lower revenues for resource owners. Using a sample of cost data for 62 companies and revenue data derived from an electricity market model, we have quantified this trade-off for the case of Switzerland. We found that electricity market price developments dominate changes in water fees and that for the profitability of hydropower, electricity prices are more important than water fee levels. However, with electricity prices of around CHF 40 per MWh, water fees can make the difference between profit and loss. Therefore, while flexible water fee regimes shift the market risk from producers to resource owners to some extent, the extent of this risk shift depends on the detailed design of the flexible regime.
Highlights
The exploitation of natural resources such as hydropower generates resource rents, which can be defined as the difference between the revenue from selling a natural resource and the cost of extracting it
While any practical implementation of a resource rent tax incorporate checks to ensure efficiency, such concerns are less relevant for the modelling of this study: We operate with ex-post data, meaning data stemming from a regulatory framework with a fixed water fee system, where plants had an incentive to operate at cost efficiency
We find that the results are very similar across different reference market price (RMP) options: The current definition of the RMP as average unit revenue leads to slightly higher water fee payments than the simpler option of taking the spot prices
Summary
The exploitation of natural resources such as hydropower generates resource rents, which can be defined as the difference between the revenue from selling a natural resource and the cost of extracting it. We asked the following questions: “What is the impact of different regimes on the profitability of hydropower producers?” and “How does a change in regime affect the revenues of resource owners (cantons and municipalities)?” As the answers to these questions depend heavily on market outcomes, we distinguished four different developments, ranging from optimistic to pessimistic, concerning the electricity price. Own study, we extend the approach of modelling the financial implications of a shift to include a resource rent tax system, using recent cost data and a detailed bottomup electricity market model to reflect the revenue side in different scenarios. We analyze the effects of different assumptions on international market developments and nationally determined water fee regimes through a detailed bottom-up electricity market model This approach allows us to assess the impact of changing water fee regimes on both the profitability of companies and the revenues of resource owners.
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