Modelling Hydro Reservoir Operation in a Deregulated Electricity Market

Abstract

We describe a medium term market simulation model which was built to help analyse the effects of contracts, and of company structure, on the efficiency of a wholesale electricity market. Our approach employs a Dual Dynamic Programming methodology, with the sub‐models at each stage being Cournot duopolies. The model played a part in the analysis which helped shape the recent New Zealand Government decisions which move the industry towards a market driven structure. Although similar moves have been made in other countries in recent years, and there have been several electricity market studies reported recently in the literature, gaming by mixed hydro‐thermal firms does not seem to have been modelled previously.