Optimal Provision of Hydroelectric Power under Environmental and Regulatory Constraints

Abstract

Hydroelectric power plants can quickly and inexpensively respond to changes in electricity demand. However, this operational flexibility can cause negative environmental im- pacts and these environmental effects are miti- gated through direct restrictions on hydropower operations, rather than taxes or other market- based mechanisms. A dynamic model of hydro- electric generation is used to derive hourly hydro- electric generation and purchases of replacement power to meet contract demand in the presence of these operational restrictions. The pattern of hydropower generation is shown to depend on differences between on-peak and off-peak spot electricity prices within the operational restric- tions set by external regulatory mechanisms.