A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Jahns, Christopher; Podewski, Caroline; Weber, Christoph Working Paper Supply curves for hydro reservoirs: Estimation and usage in large-scale electricity market models HEMF Working Paper, No. 01/2019 Provided in Cooperation with: University of Duisburg-Essen, Chair for Management Science and Energy Economics Suggested Citation: Jahns, Christopher; Podewski, Caroline; Weber, Christoph (2019) : Supply curves for hydro reservoirs: Estimation and usage in large-scale electricity market models, HEMF Working Paper, No. 01/2019, University of Duisburg-Essen, House of Energy Markets & Finance, Essen This Version is available at: http://hdl.handle.net/10419/201584 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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With increasing shares of fluctuating renewable energies, their value is even expected to increase, as – depending on the power plant type – they are able to store electricity. Therefore, an adequate representation of hydro power operation in large-scale electricity models is primordial. The aim of this paper is to analyze empirically the operation of large-scale hydro reservoirs based on observed market data. We derive supply curves for hydro reservoirs in Norway based on electricity price and hydro production time series and analyze key influencing factors. To push further, we apply the resulting supply curves in a multi-region electricity market model and show how they may be used to perform historical and counterfactual simulations. Keywords: hydropower, water value, Econometric models, large-scale electricity market models JEL-Classification: C51, L94, Q25, Q41, Q42 CHRISTOPHER JAHNS CHRISTOPH WEBER (Corresponding author) House of Energy Markets and Finance House of Energy Markets and Finance University of Duisburg-Essen, Germany University of Duisburg-Essen, Germany [email protected] Universitätsstr. 12, 45117 Essen +49-(0)201 / 183-3746 [email protected] www.hemf.net CAROLINE PODEWSKI House of Energy Markets and Finance University of Duisburg-Essen, Germany [email protected] The authors are solely responsible for the contents which do not necessarily represent the opinion of the House of Energy Markets and Finance. I Content List of Figures ......................................................................................................................... II List of Tables ..........................................................................................................................III Symbols .................................................................................................................................III 1 Introduction .................................................................................................................... 1 2 Literature Review ............................................................................................................ 2 3 Formulation of Hypotheses on Hydro Reservoir Supply Curves......................................... 4 4 Empirical Estimation of Hydro Reservoir Supply Curves ................................................... 7 4.1 Operationalization ................................................................................................. 7 4.2 Endogeneity and Non-Linearity ..............................................................................10 4.3 Regression Models and Results ..............................................................................12 5 Application in a Large-Scale Electricity Market Model .....................................................15 5.1 Large-Scale Electricity Market Model .....................................................................15 5.1.1 Standard Modeling of Hydro Reservoirs within the JMM ............................. 16 5.1.2 Implementing Empirically Derived Hydropower Supply Curves within the JMM ..................................................................................................... 16 5.2 Results ..................................................................................................................18 6 Conclusion.....................................................................................................................20 References .......................................................................................................................... XXI Acknowledgements ........................................................................................................... XXIII List of Figures Figure 1: Price duration curve, water value and production schedule of a stylized hydro reservoir. .............................................................................................................................................. 6 Figure 2: Possible bias due to price-setting thermal power plants. ............................................ 8 Figure 3: Scatterplot of prices in Norway vs. reservoir supply in Norway in week 49 in 2017. .11 Figure 4: Visualization of the effects of the different hypotheses. .............................................12 Figure 5: Step function approximation for the reservoir supply function. .................................17 Figure 6: Simulated Norwegian electricity prices compared to historical values. .....................19 II List of Tables Table 1: Overview operationalization. .................................................................................... 8 Table 2: Description and source of data. ................................................................................. 9 Table 3: Descriptive statistics (Whole Norway 01/2016-06/2018). ..........................................10 Table 4: Regression results of the different model variants. .....................................................14 Table 5: MAE and RMSE (in €/MWh) of the electricity prices for the model variants. ...............19 Symbols 퐴푠 Parameter for the reference water value of step 푠 퐵푠 Parameter for the impact of the coal price 퐶푠 Parameter for the impact of deviations from the median filling level 퐷푒푣푀푒푑푖푎푛퐹푖푙푙 Deviation from the long-term median filling level 퐷푒푣푀푒푑푖푎푛퐹푖푙푙° Deviation from the long-term median filling level minus average deviation from the long-term median filling level 퐸푓푓푖푐푖푒푛푐푦 Efficiency of a power plant 2 퐹푎푐푡표푟퐶푂2 CO -factor 퐹푖푙푙퐿푒푣푒푙푝,푎 Calculated filling level of the reservoirs in planning period 푝 and area 푎 푅푒푓 푝 푎 퐹푖푙푙퐿푒푣푒푙푝,푎 Reference filling level of the reservoirs in planning period and area 푃푟푖푐푒 Observed spot price 푃푟푖푐푒_푐표푎푙 Fuel price coal 2 푃푟푖푐푒퐶푂2 CO -price 푅푒푠푣푃푟표푑 Reservoir production 푅푒푠푣푃푟표푑° Reservoir production minus average reservoir production 푉푎푟퐶표푠푡푠퐶표푎푙 Variable costs of a coal-fired power plant 푉푎푟퐶표푠푡푠퐶표푎푙° Variable costs of a coal-fired power plant minus average variable costs of a coal-fired power plant 푢푛푖푓 푝 푎 푊푉푝,푎 Water value (former model formulation) in planning period and area 푛푒푤 푊푉푝,푎,푠 Water value (new model formulation) of steps 푠 in planning period 푝 and area 푎 푅푒푓 푎 푊푉푎 Reference water value in area III 1 Introduction Hydro electricity generation is of great importance for the current and the future electricity system since it provides electricity without emitting CO2 and moreover hydro reservoirs offer high operational flexibility. In 2016 nearly 11 % of the European electricity was provided by hydropower plants (cf. International Hydropower Association (2017)). Norway contributed the most, as it is to almost 100 % reliant on hydro power. Hydro power plants with reservoirs are of particular interest due to their ability to store energy and thereby providing flexibility to meet peak and unexpected demand. With increasing shares of fluctuating renewable infeed, their value is even expected to increase. Subsequently we focus on pure hydro storage plants without pumping since