Working paper

Long-term contracting in hydro-thermal electricity generation: welfare and environmental impact

Étienne de Villemeur, and Annalisa Vinella


We consider electricity generation industries where thermal operators imperfectly compete with hydro operators that manage a (scarce) water stock stored in reservoirs over a natural cycle. We explore how the exercise of intertemporal market power affects social welfare and environmental quality. We show that, as compared to the outcome of spot markets, long-term contracting either exacerbates or alleviates price distortions, depending upon the consumption pattern over the water cycle. Moreover, it induces a second-order environmental effect that, in the presence of a thermal competitive fringe, is critically related to the thermal market shares in the different periods of the cycle. We conclude by providing policy insights.

JEL codes

  • L13: Oligopoly and Other Imperfect Markets
  • L93: Air Transportation
  • Q50: General

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Published in

TSE Working Paper, n. 10-182, July 13, 2010