A modell of socially optimal hydro reservoir usage - yelding socially optimal outcomes in nordic electricity markets

An extensive electricity transmission network facilitates electricity trading between Finland, Sweden, Norway and Denmark. Currently most of the area's power generation is traded at NordPool, where the trading volumes have steadily increased since the early 1990's, when the exchange was founded. The Nordic electricity is expected to follow the current trend and further integrate with the other European electricity markets. Hydro power is the source for roughly a half of the supply in the Nordic electricity market and most of the hydro is generated in Norway. The dominating role of hydro power distinguishes the Nordic electricity market from most of the other market places. Production of hydro power varies mainly due to hydro reservoirs and demand for electricity. Hydro reservoirs are affected by water inflows that differ each year. The hydro reservoirs explain remarkably the behaviour of the Nordic electricity markets. Therefore among others, Kauppi and Liski (2008) have developed a model that analyzes the behaviour of the markets using hydro reservoirs as explanatory factors. Their model includes, for example, welfare loss due to socially suboptimal hydro reservoir usage, socially optimal electricity price, hydro reservoir storage and thermal reservoir storage; that are referred as outcomes. However, the model does not explain the real market condition but rather an ideal situation. In the model the market is controlled by one agent, i.e. one agent controls all the power generation reserves; it is referred to as a socially optimal strategy. Article by Kauppi and Liski (2008) includes an assumption where an individual agent has a certain fraction of market power, e.g. 20 % or 30 %. In order to maintain the focus of this thesis, this part of their paper is omitted. The goal of this thesis is two-fold. Firstly we expand the results from the socially optimal strategy for years 2006-08, as the earlier study finishes in 2005. The second objective is to improve on the methods from the previous study. This thesis results several outcomes (SPOT-price and welfare loss, etc.) due to socially optimal actions. Welfare loss is interesting as it describes the inefficiency of the market. SPOT-price is an important output for the market participants as it often has an effect on end users' electricity bills. Another function is to modify and try to improve the model by means of using more accurate input data, e.g. by considering pollution trade rights effect on input data. After modifications to the model, new welfare losses are calculated and compared with the same results before the modifications. The hydro reservoir has the higher explanatory significance in the model followed by thermal power. In Nordic markets, thermal power reserves are mostly nuclear power and other thermal sources (coal, natural gas, oil, peat). It can be argued that hydro and thermal reservoirs determine electricity supply. Roughly speaking, the model takes into account electricity demand and supply, and several parameters related to them (water inflow, oil price, etc.), yielding finally the socially optimal outcomes. The author of this thesis is not aware of any similar model being tested before. There have been some other studies that are close to the Kauppi and Liski (2008) model, but those have a somewhat different focus. For example, a specific feature in the model is the focus on long-run capacity usage that differs from the previous studies on short-run market power. The closest study to the model is from California's wholesale electricity markets that, however, uses different methodology. Work is constructed as follows.

Kymijoen vaelluskalojen nousureittien avaamisen kustannusten ja hyötyjen arviointi

The objective of this thesis is to evaluate different means of increasing natural reproduction of migratory fish, especially salmon, in the river Kymijoki. The original stocks of migratory fish in Kymijoki were lost by the 1950s because of hydropower plants and worsened quality of water in the river. Nowadays the salmon stocks is based on hatchery-reared fish, even though there is significant potential of natural smolt production in the river. The main problem in the natural reproduction is that the migratory fish cannot ascend to the reproduction areas above the Korkeakoski and Koivukoski hydropower plants. In this thesis alternative projects which aim to open these ascencion routes and their costs and benefits are evaluated. The method used in the evaluation is social cost-benefit analysis. The alternative projects evaluated in this thesis consist of projects that aim to change the flow patterns between the eastern branches of Kymijoki and projects that involve building a fish ladder. Also different combinations of these projects are considered. The objective of this thesis is to find the project that is the most profitable to execute; this evaluation can be done in comparing the net present values of the projects. In addition to this, a sensitivity analysis will be made on the parameter values that are most uncertain. We compare the net present values of the projects with the net present values of hatchery-reared smolt releases, so we can evaluate, if the projects or the smolt releases are more socially profitable in the long term. The results of this thesis indicate that especially the projects that involve building a fish ladder next to the Korkeakoski hydropower plant are the most socially profitable. If this fish ladder would be built, the natural reproduction of salmon in the Kymijoki river could become so extensive, that hatchery-reared smolt releases could even be stopped. The results of the sensivity analysis indicate that the net present values of the projects depend especially on the initial smolt survival rate of wild salmon and the functioning of the potential fish ladder in Korkeakoski. Also the changes of other parameter values influence the results of the cost-benefit analysis, but not as significantly. When the net present values of the projects and the smolt releases are compared, the results depend on which period of time is selected to count the average catches of reared salmon. If the average of the last 5 years catches is used in counting the net benefits of smolt releases, all the alternative projects are more profitable than the releases. When the average of the last 10 years is used, only building of the fish ladder in Korkeakoski and all the project combinations are more profitable than the smolt releases.