Hydro reservoir levels and power price dynamics: empirical insight on the nonlinear influence of fuel and emission cost on Nord Pool day-ahead electricity prices

Abstract

This paper examines the dependency of the hourly day-ahead electricity price on fundamentals in the Nord Pool power market. We examine whether power prices depend differently on supply and demand variables when hydro reservoir levels are low than when they are high as we expect that the competitive environment changes as a consequence. When reservoir levels are high, all hydro power producers want to sell to prevent invaluable spillovers, which leads to competitive pressure. With lower reservoir levels, hydro power agents are more preserved about their actions. We examine the change in dynamics using a supply and demand model and split the sample in observations from periods with extreme low and high reservoir levels. We show that the parameters of the supply curve model significantly differ over the two samples. In addition, we show that the influence of the marginal costs on the price formation is significantly larger at lower reservoir levels. The insights of this paper improve the understanding of power price dynamics in relation with fundamental