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Hydroeletric Generators Competing in Cascades

Rodrigo Menon Moita, Daniel Monte


Hydroelectric generation is the main source of energy production in many
countries. When firms operate in the same river, or in cascades, the output
of an upstream firm is the input of its downstream rival.
We build a dynamic
stochastic duopoly model of competition in cascades and show that the
decentralized market is inefficient when rain is frequent. However,
at the critical times when rain is infrequent the market allocation is
In an extension of our benchmark model, we show that regulatory intervention might be
necessary if peak prices are sufficiently higher than off-peak prices. In such cases,
upstream firms delay production in off-peak times, limiting their rival
downstream generators' production in peak times.


electricity markets, dynamic games, hydroelectric generation

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Fundação Getulio Vargas  EPGE - Praia de Botafogo 190, 11º andar - Tel.: (21) 3799-5831


ISSN 0034-7140 (print) ISSN 1806-9134 (online)