PNNL

Abstract

Price dynamics in wholesale electricity markets are driven by supply and demand. In markets with hydroelectric dams, the timing and amount of hydropower offered can influence prices in similar ways to wind and solar power. Unlike variable renewable energy, however, the supply of hydropower in wholesale markets is a function of both water availability and operational decisions at dams. Dam operators maximize revenues in wholesale markets by aligning production with the periods of highest expected prices, and these production decisions may in turn influence prices. Here, we examine the relative importance of two types of information in predicting forward electricity prices: a) water availability at dams, in the form of short-to-medium-range hydrological forecasts; and b) hourly production decisions at dams. Using softly coupled hydrologic, hydropower scheduling, and power systems models spanning the U.S. Western Interconnection, we quantify the importance of hydrologic forecast accuracy in correctly predicting wholesale electricity prices and compare this with the influence of dam operators’ own hourly production decisions on realized market prices. We find that dams’ practice of scheduling generation to align with the periods of high forecasted prices causes larger price forecast errors than imperfect hydrologic forecasts. This suggests that knowledge of how water is managed by dam operators within week (rather than the weekly amount of water to be managed) is more important when predicting forward electricity prices. Our findings have implications for optimal hydropower scheduling by region. Specifically, accounting for price effects is critical in markets dominated by hydropower capacity.