Economics of Ramping Rate Restrictions at Hydro Power Plants: Balancing Profitability and Environmental Concerns

Abstract

This thesis consists of three essays on the economics of ramping rate restrictions at hydro power plants. The first essay examines the impact of ramping rate restrictions imposed on hydro operations to protect aquatic ecosystems. A dynamic optimization model of the profit maximizing decisions of a hydro operator is solved for various restrictions on water flow, using data for a representative hydro operation in Ontario. Profits are negatively affected, but for a range of restrictions the impact is not large. Ramping restrictions cause a redistribution of hydro production over a given day, which can result in an increase in total hydro power produced. This affects the need for power from other sources with consequent environmental impacts.

The second essay uses a real options approach to study the impact of ramping rate restrictions on hydro power plants. We consider the effect on profits from electricity generation in order to inform policy decisions about ramping rate restrictions. A novelty of the essay is in examining the optimal operation of a prototype hydro power plant with electricity prices modelled as a regime switching process. We show that profits are negatively affected by ramping restrictions. Interestingly for a large range of restrictions, profit is not sensitive to ramping restrictions. The results point to the importance of accurately modelling electricity prices in gauging the trade offs involved in imposing restrictions on hydro operators which may hinder their ability to respond to volatile electricity prices and meet peak demands.

The third essay investigates the impact of ramping rate restrictions on hydro power plants using a three regimes model with multiple jump sizes. We consider how the multiple jump sizes among these three regimes affect the impact of ramping restrictions on the prototype hydro power plant. The numerical experiments provide further evidence that ramping restrictions have a larger impact when the expected variation in price is increased such as through an increase in the jump size which makes it desirable to change water release rates relatively frequently.

In both non-stochastic and stochastic settings, these three essays have highly consistent results on the impact of ramping restrictions on the hydro station's profit. We observe profits are significantly affected (by less than 7% in essay one, by less than 10% in essay two, and by less than 9% in essay three) in the case of the most severe ramping constraints, but we also observe a range of less severe ramping restrictions over which profits are not substantially affected (by less than 2% in essay one, by less than 3% in essay two, and by less than 2% in essay three). Results from this thesis should facilitate the implementation of ramping rate restrictions for environmental and economic benefits.