Uncertainty in hydroelectric power supply

Abstract

This paper discusses the dimensioning and capacity utilization of a hydroelectric power system when uncertainty in supply and demand is taken explicity into consideration. It is shown how the optimal sales of firm power depend on properties of the long-term and short-term demand curves. A long-run marginal cost criterion is derived, which shows that the long-run marginal cost should be equal to the expected price in the short-term market. Uncertainties in supply as well as demand will, under reasonable assumptions, reinforce each other with respect to their implications for the excess capacity in the hydro power system.