Even Flow - Water coordination efficiency & Hydropower production under outflow regulation

Abstract: This thesis sets out to investigate the impact of the European Union’s water framework directive on water coordination efficiency in the hydropower market, and whether water coordination inefficiency might offset the benefits of market competition. I implement a dynamic market model examining Stackelberg competition and a monopoly/collusion market type with regards to reservoir and production capacities and the impact of upstream production plans on downstream production possibilities. The main finding is that under limited storage possibilities, the lack of centralized coordination planning causes competition to be less desirable than a private monopoly from a consumer welfare maximizing perspective. However, granted that the reservoir and storage possibilities are big enough in relation to the outflow requirement – the benefits of competition outweigh this coordination cost and the need for collusive behavior.