The Journal of Energy Markets (2343)

Volume 5/Number 3, Fall 2012

A simplied approach for optimizing hydropower generation scheduling

Frode Kjrland
Bod Graduate School of Business, University of Nordland, PO Box 1490, 8049 Bod, Norway; email: fkj@uin.no and Trondheim Business School, Jonsvannsveien 82, 7004 Trondheim, Norway

Berner Larsen
Bod Graduate School of Business, University of Nordland, PO Box 1490, 8049 Bod, Norway; email: bel@uin.no

This paper presents a simplied model for optimizing hydropower scheduling for a small producer with a high degree of exibility. The approach involves selecting the hours with the highest prices. The power plants run at full capacity all hours of the next days when hourly spot prices are greater than the upper p percentile of the hourly spot prices for the last two years (17 520 hours), and do not run otherwise. The simulations for an eight-year period, 20029, show a considerable increase in income. The producer can achieve 19% more income compared with a more naive strategy of generating at peak hours on weekdays. Our simulations also show that an optimal choice of p is a value lower than the load factor of the plants, due to the general increase in prices in the studied period.

1 INTRODUCTION
The purpose of this paper is to apply a simplied model for a hydropower producer in order to optimize the generation scheduling for maximizing revenue. Hydropower producers face a number of dynamic factors affecting short-term production planning. Each day a decision has to be made concerning whether to operate and, if so, which of the twenty-four hours of the next day one ought to commit to generation. However, such short-term planning is also coupled with more long-term planning. We present a simple model for a small participant controlling two plants with considerably large reservoirs and relatively high turbine capacity and also suggest simple rules for everyday decisions concerning the next day in order to increase prots.
We thank participants at the ElCarbonRisk seminar at Skeikampen in April 2011, participants at the 34th IAEE conference in Stockholm in June 2011 and anonymous referees, including two participants in the industry, for valuable comments.
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F. Kjrland and B. Larsen

Several approaches have been discussed in the literature to solve short-term operation scheduling problems for a hydropower producer in order to maximize revenue. A peakload producer in the context of the Nordic electricity market has to pick the hours with the highest prices. Prices uctuate over the day, week, season and year. Hence, the uncertainty in future precipitation, temperature, reservoir level, short- and long-term prices, risk of ood, etc, has to be taken into account when making decisions concerning generation scheduling.

1.1 Literature review

Optimization of hydropower generation has been addressed in several studies in the research literature on the subject. Revenues from hydropower generation are uncertain due to the uncertainty regarding both price and production. The stochastic conditions in the spot and forward prices, as well as inow and production capabilities, emphasize the need to incorporate some form of dynamic management tool, which is discussed in general terms in, for example, Hongling et al (2008), Labadie and Stitt (2004), Yamin (2004) and Fleten and Wallace (2002). Moreover, there are a number of studies applying some type of mathematical programming, such as Chang et al (2001) and Wang (2009). The approach that is most similar to the model presented in this paper is the so-called peak-shaving method (see, for example, Simopoulos et al (2007)). However, many of these studies concern the aggregate system level and do not focus on the generator as the unit of analysis. The different types of models make various simplifying assumptions in order to reduce the complexity of hydropower scheduling. Furthermore, there is an abundance of contexts relating to market environment, regulation and energy system. There are also quite a few studies related to Norwegian hydropower production. Norway is the worlds sixth largest hydropower producer, but, after Iceland, it is the country with the highest percentage of total hydropower electricity production. It is therefore natural that the optimization of hydropower generation has been the subject of several studies in a Norwegian (and Nordic) context. Because of all these issues, software has been used extensively to help producers adapt in order to maximize prots. Fosso et al (1999) conceptually describe an approach where water value calculations and forecasts of future spot prices are key elements in long-term, medium-term and short-term scheduling. Nskkl and Keppo (2008) focus on the forward curve dynamics and show how forward prices can be used for postponing generation to high-price seasons. Their study includes an empirical application to a Norwegian hydro producer. Recent studies concerning water scheduling problems in a Spanish context, such as Prez-Daz et al (2010a,b), also include forecasts of electricity prices. Their approaches are based on dynamic programming and nonlinear programming, respectively. An empirical study of thirteen Norwegian
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hydropower producers (Fleten et al (2008)) also shows the extensive use of forward price information in scheduling. Our approach is fundamentally different. We do not incorporate any forward price information, forecasts or observed prices from the nancial market. The model described in this paper leans on historical price information. Our model is also simpler and it is unique because of the use of the p percentile of the historical spot prices rather than any type of linear/nonlinear programming or operation management. Still, the results are useful for producers controlling reservoirs with a high degree of exibility.

1.2 The Nordic electricity market

The Nordic electricity market, in particular the Norwegian electricity market, has some special properties due to the dominance of hydro. In Norway, about 97% of electricity generation is hydropower (about 50% in the Nordic countries overall). The capacity in Norwegian reservoirs is about 84 TWh, representing about 70% of normal annual production (approximately 121 TWh). Hence, many generators possess the exibility to adapt so that more can be produced when prices are relatively high. However, several risky aspects must be addressed, such as uncertain future prices, uncertain inows, uncertain production volume, risk of ooding and/or excessively low water reservoir levels (governed by the regulation license). The physical production of electricity is organized in two markets: the regulator market and a day ahead market (Benth et al (2008)). Nord Pool Spot is the Nordic power exchange for actual generation. It has evolved from being a Norwegian power exchange to operating in Denmark, Finland and Sweden as well. Elspot is the market for physical contracts and is an auction-based one day in advance market for each hour of the following day. Approximately 70% of Nordic consumption is traded at Elspot. Each day, both buyers and sellers submit prices and volumes for each of the twentyfour hours of the following day. This market closes at 12 noon every day. On this basis, a derived price is set for each of the twenty-four hours of the following day. Because of constraints in the grid, these prices can be different in the different price zones.1 The average price is the so-called system price (which assumes no bottlenecks in the system and is therefore a theoretical national spot price). Strictly speaking, the spot price is a forward contract with delivery in a specic hour the next day. The nancial market is operated by NASDAQ OMX (formerly Eltermin). This is a different arena to the physical markets. In this market there are a signicant number of futures and forward contracts ranging from several weeks to ve years ahead (Nord Pool (2009)). These contracts are settled against the system price in the delivery
1

Norway was divided up into ve areas in 2011.

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F. Kjrland and B. Larsen FIGURE 1 Spot price (area price) of NO4 in 20029.

500

400 NOK/MWh

300

200

100 01/2002 01/2004 01/2006 Month

Monthly average (ninety-six observations) in Norwegian kroner/megawatt (NOK/MW). 1 2011. The gure includes a trend line.

01/2008

12/2009

7.80 NOK in August

period. In reality, one can say that these forward contracts are what the textbooks refer to as swaps, since the settlement of these contracts is to exchange a oating electricity price (system price) for a xed price (futures or forward price). Largely because of the variability and uncertainty in rainfall and temperature, shortterm prices (spot and short forward) tend to be very volatile. Reservoir levels, recent rainfall and weather forecasts have a signicant impact on short-term prices. Therefore, short-term electricity prices are sometimes termed weather derivatives. In Figure 1 we have plotted data for the monthly average area price NO4, which is the relevant spot price for the analysis later in this paper (until January 11, 2010, this was NO3). The gure shows that prices have been rising throughout the period 20029. Although prices uctuate according to the seasons, there has been a general increasing trend over the period. This is due to the growing demand without a corresponding increase in supply (Kjrland (2009)). The gure also demonstrates the high volatility in Norwegian electricity spot prices, showing the attractiveness of generating during peak price periods. One can also observe three shocks during this period. In 20023 there was a shock winter, when the combination of low reservoir levels due to a dry autumn in 2002, with very little rainfall, together with cold temperatures resulted in extremely high spot prices. However, the summer of 2006 (low reservoir levels
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A simplied approach for optimizing hydropower generation scheduling

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because of a cold winter, dry summer and reduced capacity of Swedish nuclear thermal power) and the fall/early winter of 2008 (unusually low rainfall in early fall and, hence, low reservoir levels) were also characterized by high spot prices.

2 THE MODEL
The idea of the model is to pick the hours with the highest prices. As mentioned, electricity prices vary signicantly over years, seasons, weeks and during the day. Since the physical turnover at Nord Pool Spot takes place on an hourly basis, there will naturally be a signicant gain by adapting production to the hours with the highest price, typically during daytime on weekdays and typically in winter. This approach is based on a daily decision for submitting a bid for each of the twenty-four hours the following day with full capacity if the price is above a threshold and nothing otherwise. Suppose that a hydropower plant has a load factor of Q%, meaning that the middle yearly generation is produced in Q% of the hours of the year when running at full capacity. Suppose further that we have a database with the spot price for each hour in a given period of some years. Obviously, the revenue is maximized for this period if it is possible to run the plant at capacity at all the hours when the price is larger than the upper Q percentile of all the prices in the database. This means that the plant is run at full capacity at all the hours with the Q% highest prices in the database, and is not run otherwise. However, we cannot use this algorithm without adjustments, as we do not know the prices for all the hours in the period when the decision about production is made. In addition, the reservoir capacity may be too small to store all the water when the plant is not running, and there may be too little water to run the plant at capacity every hour the price constraints are duly satised. Therefore, we make the following adjustments to the algorithm. Instead of letting the price threshold be the upper Q percentile of all the prices in the database, we let the price threshold be the upper p percentile of the 17 520 latest hour prices (two years) when the bid is submitted. (When p is given, this percentile may be computed before the bid is submitted.) If the reservoir level is at least 96% (upper threshold industry standard) at the beginning of a week, the plant is run at capacity every hour of this week irrespective of the price. This is done to prevent water being lost. If the reservoir level is below 15% at the beginning of the week, the plant is not run at all during that week.2
2 The choice of 15% as the lower threshold is somewhat random, but close to a typical level. However,

this level varies according to the licenses given and the physical conditions present in the reservoir.
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F. Kjrland and B. Larsen

In our simulations we have selected a value of p such that the reservoir level at the end of the eight-year simulation period is approximately equal to the reservoir level at the beginning of this period. In practical use of this p strategy, it is not possible to decide the value of p in this way. However, the following are some guidelines for selecting a suitable value of p . If there is no long-term trend in the spot price, let p D Q, where Q is the load factor of the plant in percent. (If A is the total production in GWh during a given period, B is the capacity of the plant in GW and C is the total number of hours during this period, the load factor (in percent) is Q D 100.A=.BC //.) If there is a long-term increasing trend in the spot price, as shown in Figure 1 on page 26, let p be somewhat lower than Q, eg, 75% of Q. If there is a long-term decreasing trend in the spot price, let p be somewhat higher than Q, eg, 110% of Q. Normally, this p strategy performs well if the reservoir level varies a lot over years, but the upper threshold and the lower threshold are seldom or never hit. If the reservoir level is often at the lower threshold, but very seldom at the upper threshold, the production is too large on average, so one should select a lower value of p to reduce the average production. If the reservoir level is often at the upper threshold, but very seldom at the lower threshold, the production is too small on average, so one should select a higher value of p to increase the average production. If the reservoir level is often at both thresholds, it means that, in longer periods, the selected hours for generation are based on either extremely high or extremely low reservoir levels (the threshold values of 96% and 15%, respectively, are activated) and not selected based on the spot prices, as intended. In such cases, the p strategy is surely not optimal. To illustrate the impact this strategy has on revenue, we have compared this approach with three primitive approaches. One simple strategy is to x the hours in each week that the plant is run at full capacity. (If A is the total production in GWh during a given period, B is the capacity of the plant in GW and N is the total number of weeks during this period, the plant has to be run A=.BN / hours each week during this period.) If we choose the hours of the week that, on average, have the highest spot prices, we maximize the revenue given this xed production level each week. We call this a by day strategy as this implies that the plant is mostly running on daytime MondayFriday. If we, on the contrary, choose the hours of the week that, on average, have the lowest spot prices, we minimize the revenue given this xed production level each week. We call this a by night strategy as it implies that the plant is mostly running at night. The difference in total revenue between the by day
The Journal of Energy Markets Volume 5/Number 3, Fall 2012

A simplied approach for optimizing hydropower generation scheduling TABLE 1 Descriptive statistics for the virtual hydropower plants. Average yearly generation (GWh) 84.5 16.2 100.7

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Plant A B Sum

Capacity (MW) 54.0 6.8 30.8

Reservoir capacity (GWh) 196 48 244

Reservoir quotient 2.32 2.96

Load factor (%) 43.67 28.0

and the by night strategy is the maximal increase in total revenue that is achievable by moving production hours within the week. A third strategy is to combine daytime production and avoid the summer months (MayAugust). (If A is the total production in GWh during a given period, B is the capacity of the plant in GW and N is the total number of weeks during this period, the plant has to be run 3A=.2BN / hours each week outside the summer months during this period. As before, we choose the hours in the week with the highest average spot prices.) We call this strategy not summer. The difference in total revenue between the by day and the not summer strategies measures what is gained by moving the production in the summer season to the other seasons in this naive way.

3 MODEL APPLICATION
We apply the model to a small producer (price taker) controlling two hydropower plants, A and B,3 located in the price area NO4 (Northern Norway). The studied company controls parts of two larger hydropower plants, leaving them in control of two virtual power plants. Hence, they can produce according to full capacity and do not need to relate to the so-called best point of generation (where the efciency of the turbines is highest). Some descriptive statistics of the two plants are reported in Table 1. To conduct simulations we have used data collected from the producer and Nord Pool Spot. This data includes: data concerning the actual power plants, A and B; data concerning the water reservoirs levels of plants A and B; inow data, on a weekly basis; spot price data for area NO4 (hourly rates) for 20002009.
3 We

have anonymized the plants in agreement with the controlling company.

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F. Kjrland and B. Larsen

The simulations are conducted from January 7, 2002 through December 27, 2009, ie, for 416 weeks. We then calculate the following when running the script. The number of weeks in which reservoir levels were below the lower threshold of the reservoir level, which is set to 15%. The power plants do not run during these weeks. The number of weeks in which reservoir levels were above the upper threshold of 96% (industry standard). In these weeks, plants A and B produce, at all hours, 24 MW and 6.8 MW, respectively. The number of weeks in which there was ooding. Lost production, lost GWh due to ooding. Total production indicates how many GWh in total are produced during the 416 weeks. Total revenue indicates the total income generated during the 416 weeks, when using the spot price of NO4 for every hour of electricity generation. The achieved average price is the quotient between total revenue and the sum of total production and lost production. Thus, the achieved average price is a measure of how well water resources are exploited in order to generate revenue. The reservoir level at January 6, 2002 is set to 75% and 50% for plant A and plant B, respectively. The level for plant A is taken according to the actual level on this date. The level for plant B is set higher because the actual level, 32.7%, was unusually low. The reservoir level on December 27, 2009 indicates the simulated water reservoir level in percent at midnight on that date. When assessing revenue for the period, it is important to take into account the water reservoir level at the end. Obviously, the water represents value. In order to be able to ignore this aspect, we have tuned the strategies so that the simulated water reservoir levels at the end are approximately the same as the start level. Hence, production for the eight-year period is quite similar to total inow and consequently the different strategies are comparable. The optimal value of p is found when p D 34:5 and p D 21:3 for plant A and plant B, respectively. These values are found on the basis of the deterministic end value of the reservoir levels and are thus found retrospectively. Concerning the other strategies, we have computed the mean of the spot price for each of the 168 hours in
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the week for the 416 weeks in the simulation period and picked the correct number of hours with the highest/lowest mean of the spot price. As a result, the following production hours are selected each week for the naive strategies. For plant A, we have dened the by day strategy as production in hours 822 on Monday to Thursday and in hours 820 on Friday. For plant B, we use production in hours 814 and 1719 on Monday, hours 819 on Tuesday, hours 813 and 1719 on Wednesday, hours 819 on Thursday and hours 912 on Friday. We have dened the by night strategy as follows. For plant A, production in hours 16 and 24 on Monday to Thursday, hours 16 and 2224 on Friday, hours 19, 1417 and 2124 on Saturday and hours 118 and 24 on Sunday. For plant B, production in hours 16 on Monday, hours 25 on Tuesday, hours 26 on Wednesday to Friday, hours 28 and 24 on Saturday and hours 110 and 1417 on Sunday. The not summer strategy is dened for plant A as production in hours 724 on Monday to Thursday, hours 723 on Friday, hours 1, 10 14 and 1723 on Saturday, and hours 1213 and 1823 on Sunday, but no production in the months MayAugust. For plant B it is dened as production in hours 822 on Monday to Thursday and in hours 815 and 1719 on Friday, except for during the months MayAugust. In order to say something about how well our model performs, we compute the best possible theoretical outcome, best Q%. This is in retrospect, when all prices are known. Q is the load factor in percent for the plant, ie, Q D 43:67 for plant A and Q D 28:0 for plant B.4 This means that the simulation is performed on the upper Q percentile of the NO4 hourly prices in 20029 in retrospect. Hence, the calculated numbers do not represent any strategy. However, we have programmed the script to ignore the upper and lower threshold, making the results denitely theoretical, as shown in Figure 2 on the next page and Figure 3 on the next page concerning simulated water reservoir levels.Yet, this provides relevant information when assessing the other presented strategies. The results of the simulations concerning plant A and plant B are shown in Table 2 on page 33 and Table 3 on page 34, respectively. The simulated water reservoir levels are shown in Figure 2 on the next page and Figure 3 on the next page. We have included the strategy p D Q (ie, the new p strategy, but with p equal to the load factor Q rather than the optimal value of p ) in the tables and gures to illustrate that this is not an optimal choice of p . We see that the total production is too high, such that the reservoir level is low for a large part of the period. This means that the condition for production should be stricter, ie, p should be lowered. The numbers show that comparing the by night strategy with the by day strategy reveals a difference of 29.9 million NOK and 6.9 million NOK for plant A and

4 The

load factors are calculated on the basis of the inow data 20029.
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F. Kjrland and B. Larsen FIGURE 2 Simulated reservoir level for plant A.

200

150 Reservoir level (%)

100

50

0 01/01/02 01/01/04 01/01/06 01/01/08 01/01/10

Solid black line: best 43.67%. Solid gray line: p D 34.5. Dashed black line: p D 43.67. Dotted black line: not summer. Dashed gray line: by day/by night.

FIGURE 3 Simulated reservoir level for plant B.

150

Reservoir level (%)

100

50

0 01/01/02 01/01/04 01/01/06 01/01/08 01/01/10

Solid black line: best 28%. Solid gray line: p D 28. Dotted black line: p D 21.3. Dashed black line: not summer. Dashed gray line: by day/by night.

The Journal of Energy Markets

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Research Paper

A simplied approach for optimizing hydropower generation scheduling

TABLE 2 Results of simulations for plant A. Achieved average price (NOK/MWh) 387.5 348.3 363.0 310.7 269.7 311.8 Weeks below lower threshold 43 0 0 0 0 Weeks above upper threshold 9 11 0 0 1

Total revenue (MNOK) Best 43.67% p D 43.67 p D 34.5 By day By night Not summer 283.4 266.6 266.0 226.5 196.6 227.2

Total production (GWh) 731.2 765.5 732.8 728.9 728.9 728.7

Reservoir level (%) 75.6 58.1 74.8 76.8 76.8 76.9

Weeks with ooding 0 0 0 0 0

Lost production (GWh) 0 0 0 0 0

The reservoir level is given at December 27, 2009. The reservoir level at the beginning of the period (January 6, 2002) was 75%. MNOK denotes million NOK.

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TABLE 3 Results of simulations for plant B. Achieved average price (NOK/MWh) 434.7 375.4 404.7 316.1 263.4 320.7 Weeks below lower threshold 44 5 0 0 0 Weeks above upper threshold 0 3 0 0 0

Total revenue (MNOK) Best 28.0% p D 28 p D 21.3 By day By night Not summer 57.7 51.2 53.7 42 35.1 42.6

Total production (GWh) 132.7 136.4 132.8 132.9 133.1 133.0

Reservoir level (%) 50.6 43.0 50.3 50.2 50.2 49.9

Weeks with ooding 0 0 0 0 0

Lost production (GWh) 0 0 0 0 0

The reservoir level is given at December 27, 2009. The reservoir level at the beginning of the period (January 6, 2002) is set to 50.0%. MNOK denotes million NOK.

A simplied approach for optimizing hydropower generation scheduling TABLE 4 The results of the pairwise formal tests of differences in strategies regarding plant A for the whole period 20029. Standard error 0.0000269 0.0000391 0.0000536 0.0000293

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Pair of strategies Best 43.67% /p D 34.5 p D 34.5/by day By day/by night By day/not summer

Estimate 0.0002488 0.0005648 0.0004282 0.0000105

t -value 9.2641792 14.4485614 7.9831992 0.3594597

Pr .>jt j/ 0.0007550 0.0001334 0.0013345 0.7374245

Estimate is the estimate of the regression coefcient (the constant) and Pr .>jt j/ is the p -value in the Student t distribution with four degrees of freedom.

TABLE 5 The results of the pairwise formal tests of differences in strategies regarding plant B for the whole period 20029. Standard error 0.000008 0.000011 0.000012 0.000006

Pair of strategies Best 28% /p D 21.3 p D 21.3/by day By day/by night By day/not summer

Estimate 0.000057 0.000168 0.000099 0.000009

t -value 7.416535 15.506989 8.518869 1.416152

Pr .>jt j/ 0.001764 0.000101 0.001042 0.229673

Estimate is the estimate of the regression coefcient (the constant) and Pr .>jt j/ is the p -value in the Student t distribution with four degrees of freedom.

plant B, respectively. Moreover, the simulations show that at p D 34:5 for plant A and p D 21:3 for plant B, the accumulated nominal earnings for the eight-year period become much higher and quite close to the theoretical best possible outcome. The optimal p strategy captures approximately 70% and 75% for plant A and plant B, respectively, of the gap between the by day strategy and the best Q% approach in retrospect. This indicates that the model is performing well. We formally test whether or not the difference in revenue between two strategies is statistically signicant in the following way. We regress the differences in the hourly revenues between the two strategies on a constant, using robust t -values with the NeweyWest autocorrelation and heteroskedasticity consistent covariance matrix. We use four degrees of freedom in these tests, as recommended in Lange et al (1989). The information in Table 4 and Table 5 shows that, for each pair of strategies in the table, the difference in revenue is signicant at 0.2% signicance level, except when comparing the by day strategy with the not summer strategy. The results conrm the well-known fact that the difference in revenue between the naive by day and by
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F. Kjrland and B. Larsen FIGURE 4 Cumulative revenue for plant A.

300 Cumulative revenue (million NOK) 250 200 150 100 50 0 2002 Q1 2004 Q1 2006 Q1 Quarter 2008 Q1 2009 Q4

Solid black line: p D 43.67. Dashed black line: p D 34.5. Solid gray line: not summer. Dotted black line: by day. Dashed gray line: by night. Dotted gray line: best 43.67%.

night strategies is highly signicant. However, the difference between the optimal p strategy (p D 34:5 for plant A and p D 21:3 for plant B) and the naive by day strategy is even more signicant, as the t -value has almost doubled (14.4 versus 8.0 and 15.5 versus 8.5, respectively). We also see that the difference in revenue between the best Q% approach and the optimal p strategy is approximately at the same signicance level as the difference in revenue between the by day strategy and the by night strategy. However, we have to bear in mind that the best Q% approach gives a theoretical upper bound for the revenue as the tests against the lower and upper threshold of the reservoirs are removed. We see clearly from the plots of the respective simulated reservoir levels for plant A and plant B, shown in Figure 2 on page 32 and Figure 3 on page 32, that it is impossible to run the best Q% approach. We also show the cumulative revenues for plant A and plant B in Figure 4 and Figure 5 on the facing page, respectively. These gures conrm how well our model performs, as the optimal p strategy clearly provides more revenue than the naive strategies and is close to the theoretical best possible outcome for this eight-year period. Details concerning production and revenue for each year are found in Table 6 on page 38.
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A simplied approach for optimizing hydropower generation scheduling FIGURE 5 Cumulative revenue for plant B.

37

80 Cumulative revenue (million NOK)

60

40

20

0 2002 Q1 2004 Q1 2006 Q1 Quarter 2008 Q1 2009 Q4

Solid black line: p D 28. Dashed black line: p D 21.3. Solid gray line: not summer. Dotted black line: by day. Dashed gray line: by night. Dotted gray line: best 28%.

4 DISCUSSION
The numbers show a clear difference between the by day strategy and the by night strategy. The difference in revenues represents the approximate gain achieved by choosing the most favorable hours of the week. The increase in revenue is 15.9% for both plants in total. However, by using the optimal p strategy, one will more effectively capture all the dynamics in the market, since one is then able to produce at favorable hours of the day or days of the week, over seasons and over years. This strategy provides a substantial additional income. In fact, the increase is larger from the by day strategy to the optimal p strategy than from the by night strategy to the by day strategy. If one relates the increases to the optimal p of 34.5 and 21.3 for plant A and plant B, respectively, income is increased by 19.1% in total. However, on the other hand, this provides a greater variation in income between years (see Table 6 on the next page). This may be problematic for public owners needing a predictable income for their budgets and for the planning of various public services.5
5 Around 8590% of Norwegian hydropower generation is publicly owned (by municipalities, coun-

ties and the state).

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TABLE 6 Simulated production and revenue for (a) plant A and (b) plant B each year in the period 20029 for the different strategies and the best Q in retrospect. [Table continues on next page.] (a) Plant A 2002 2003 2004 2005 2006 2007 2008 2009 GWh MNOK GWh MNOK GWh MNOK GWh MNOK GWh MNOK GWh MNOK GWh MNOK GWh MNOK Best 43.67% 30.9 13.95 93.8 33.67 p D 43.67 105.8 28.36 191.6 57.57 p D 34.5 103.5 27.77 173.9 53.66 By day 90.1 19.14 91.5 28.47 By night 89.7 16.81 91.3 24.63 Not summer 90.4 22.05 91.5 29.83 10.6 44.6 22.9 91.8 91.5 91.9 3.07 12.13 6.48 23.43 21.24 22.55 12.9 74.5 57.3 91.1 91.5 91.2 4.12 195.4 79.19 20.2 163.5 67.41 15.86 187.8 76.78 22.87 91.1 37.98 20.12 91.6 34.18 22.23 90.9 36.94 51.2 41.5 27.1 91.5 91.3 91.1 17.94 185 15.07 132.4 10.41 144.8 23.51 91.8 19.52 91.4 24.78 91.9 80.27 151.3 51.15 60.18 11.5 5.73 67.34 15.4 7.69 40.52 90 30.57 34.46 90.6 25.59 38.83 89.8 30.02

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A simplied approach for optimizing hydropower generation scheduling

TABLE 6 Continued. (b) Plant B 2002 2003 2004 2005 2006 2007 2008 2009 GWh MNOK GWh MNOK GWh MNOK GWh MNOK GWh MNOK GWh MNOK GWh MNOK GWh MNOK Best 28% p D 28 p D 21.3 By day By night Not summer 7.2 19.5 15.5 16.4 16.4 16.3 3.48 6.29 5.55 3.55 3 4.07 11 33.1 26.8 16.7 16.7 16.8 4.86 10.95 9.51 5.27 4.41 5.59 0.1 1.2 0.3 16.7 16.7 16.9 0.04 0.37 0.09 4.31 3.83 4.22 0.8 12.5 11.4 16.6 16.7 16.6 0.32 3.53 3.16 4.25 3.59 4.16 42.5 35.4 47 16.6 16.7 16.5 18.49 13.28 19.38 7.01 6.16 6.86 8.8 4 1.2 16.7 16.7 16.6 3.34 1.63 0.55 4.38 3.46 4.66 45.6 29.3 29.5 16.8 16.7 16.9 20.66 14.19 14.63 7.49 6.06 7.34 16.7 1.4 1.1 16.4 16.5 16.4 6.49 0.96 0.87 5.75 4.55 5.75

The numbers show that the revenue would have varied considerably, particularly in 2004 where prices were low (a wet year), while 2006 and 2008 had exceptionally high prices (dry years). The low gures for 2004 are partly because the cumulative prices in the database were dominated by the high prices in late 2002 and early 2003. The volatility is, naturally, lower for the naive strategies. MNOK denotes million NOK.

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F. Kjrland and B. Larsen FIGURE 6 Achieved average price for plant A.

Achieved average price (NOK/MWh)

600 500 400 300 200 100 0 Best 43.67%

p = 43.67

p = 34.5

By day

By night

Not summer

Another source of information is the achieved average price, where we also include the fact that some water is lost due to ooding (as for p D load factor). The simulated average achieved price is given in Table 2 on page 33 and Table 3 on page 34 and visualized in Figure 6 and Figure 7 on the facing page. A key assumption for the model is that the empirical distribution of the latest 17 520 hourly spot prices is representative for future spot prices. If some kind of long-lasting shock occurred, this could lead to a bad selection of generating hours, because prices for the last two years were formed under different circumstances. If so, one could adjust the model by changing the p -value. However, one should not lower the number 17 520, because one would not then capture the volatility between seasons, nor between dry and wet years. The simulated period has been characterized by a general increase in prices, as shown in Figure 1 on page 26, due to a rising market over the past decade. This is the main reason why the optimal p of the plants is lower than the load factor of the plants. If the price trend had been the opposite, the optimal p would have been higher than the load factor. However, the model would be applicable anyway. Even if a long-lasting decreasing trend does not seem particularly probable, the model is robust. Anyway, the choice of p should be reassessed regularly.

5 CONCLUSIONS AND IMPLICATIONS

All the presented strategies represent simple models providing simple rules for how a producer in the future can exploit his hydropower resources and adapt to the
The Journal of Energy Markets Volume 5/Number 3, Fall 2012

A simplied approach for optimizing hydropower generation scheduling FIGURE 7 Achieved average price for plant B.

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800 Achieved average price (NOK/MWh)

600

400

200

0 Best 28%

p = 28

p = 21.3

By day

By night

Not summer

dynamics of the Nordic electricity market. It is always easy to assess a strategy in retrospect, but the simulations show how a small participant (price-taker) can adapt to increase income in the future by applying our model. As a conclusion of the analysis, we recommend that the producer implements the optimal p of 34.5 for plant A and 21.3 for plant B. This will provide considerable additional income. If the producer believes in a different future trend of electricity prices, other p -values can be considered according to previous comments in this paper. Also, if reservoir levels become either very high or very low, adjustments should be made. Concerning implementation of the model, we do, however, see some counterarguments. This strategy provides a great deal of variation in income from the physical production. The method implies that one can hold back for longer periods if the prices are low. This is possible due to the high degree of exibility in both reservoirs and turbine capacity. The volatility can be reduced by using nancial contracts, but still the variation will remain signicant. The model assumes no large, long-lasting shocks. Short-term conditions are tackled sufciently, but the method needs to be modied in some way if it is to take account of large and long-term changes in the market, possibly by adjusting the chosen value of p . The model is designed for a small producer with relatively small resources and possibly a low level of expertise. Hence, even if the model is simple compared with other strategies in the industry, implementation can, to a certain extent, prove demanding. This can be overcome with the aid of consultants.
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F. Kjrland and B. Larsen

We do not think that any of these counterarguments are particularly compelling. There are therefore great advantages to be gained through implementing the model. The approach stands up as robust with respect to uctuations in days, weeks, seasons and years. The method also allows one to generate during many of the hours with the highest prices; the consequences in terms of extra revenue are signicant. Over the eight-year period, the simulations show that revenues would be more than NOK 50 million higher (19.1%) compared with the simpler by day strategy. Bear in mind that the by day strategy is not that naive. The difference in income is considerable. The model enables a producer that has a high degree of exibility in their generation to exploit most of the volatility of a hydropower-based electricity market such as the Norwegian market.

REFERENCES
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