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Market Offering Strategies for Hydroelectric Generators

Department of Statistics, University of Auckland, Private Bag 92019, Auckland, NewZealand
Department of Engineering Science, University of Auckland, Private Bag 92019, Auckland, NewZealand
g.pritchard{at}auckland.ac.nz
g.zakeri{at}auckland.ac.nz

This paper considers the problem of offering electricity produced by a series of hydroelectric reservoirs to a pool-type central market. The market model is a simplified version of the New Zealand wholesale electricity market, with prices modelled by a first-order Markov process. The demand for electricity is not explicitly modelled. The hydroelectric generator is assumed to be unable to influence market prices (i.e., to be a price-taker). We discuss the resulting stochastic dynamic program, methods for its solution, and the explicit optimal offer curves that it produces. It is shown that the utility function is monotone increasing with respect to both reservoir level and current price; however, the optimal offer curves need not be monotone. This is shown by example. Numerical results are provided.

Subject classifications: Dynamic programming: finite state, Markov; Probability: Markov processes; Natural resources: energy, water resources.
History: Received October 1999; revision received March 2002; revision received May 2002; revision received June 2002; accepted July 2002.