Policy measures and storage in a hydropower system

In this paper we discuss how three different public policy measures affect water storage controlled by hydropower producing firms. In particular we discuss measures to promote competition, increase transmission capacity and rationing. The analysis is conducted within the framework of an oligopoly model where 2 hydro producing firms engage in dynamic Bertrand competition. We extend this model to be able to analyse how the three policy measures affect storage by hydropower producing firms and focus especially on the probability of hydropower replacing thermal production. We find that competition, represented by the Bertrand-Nash solution leads to lower storage compared to the monopoly solution. Furthermore, we find that increased transmission capacity and rationing both lead to more fierce competition in situations when water is plentiful and thus to a reduction in storage. These results imply that increased competition, transmission capacity and rationing all contribute to an increased probability of hydropower replacing thermal production.