Did hydropower generators in Nord Pool exercise market power during 2006?: - A simulation analysis of hydro production in Norway and Sweden

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Abstract This thesis analyzes whether the production allocation strategy of hydro producers in Norway and Sweden during 2006 was consistent with market power behaviour. To attain a measure for a competitive hydro allocation, the simulation model PoMo (Power Model) was used. The simulation model takes current market conditions into account (for e.g. water inflow and store level) and assumes that hydro producers act as price takers. Consequently, PoMo predicts competitive hydro output levels. The observed hydro production in Norway and Sweden during 2006 was then related to the production levels predicted by the simulation model. Two types of allocation strategies were identified and tested for; direct and indirect withholding of output. The former strategy refers to a situation where the hydro producer directly constrains its production during the high demand period. The latter refers to a situation where the hydro producer withholds output from the high demand period by overproducing during the low demand period. The results of this thesis indicate that hydro producers in Sweden and Norway were exercising market power by indirectly withholding output during 2006. The findin...