Decentralizing hydropower production.

Summary The authors analyze the hydroelectricity production by n power plants in a dynamic model. The production of each plant is constrained by the supply constraint and the storage constraint. They derive the monopoly and imperfect competition solutions. They show that hydroelectric production can be affected by two sources of inefficiency: suboptimal management of water resources and the exercise of market power. A monopolist minimizes the first source of inefficiency while imperfectly competitive generation minimizes the second. The decision to introduce competition into hydropower generation must take into account both of these effects.