Real-Time Versus Day-Ahead Market Power in a Hydro-Based Electricity Market

Within a theoretical framework, Thomas Tangerås and Johannes Mauritzen analyze the link between real-time and day-ahead market performance in a hydro-based wholesale electricity market. The marginal cost of hydropower is unobservable since the cost mainly is the foregone value of postponed production - the water value. As the expected value of production determines the day-ahead price of electricity, day-ahead electricity prices contain information about the water value. Theoretical predictions of the model are tested on data from the Nordic power exchange, Nord Pool Spot (NPS). The hypothesis that prices at NPS were at their competitive levels throughout the period under examination is rejected. The empirical approach uses equilibrium prices and quantities and does not rely on bid data or estimating demand or marginal cost functions.