Determinants of Regulated Hydropower Supply in Norway

Having an average annual production of about 130 TWh and close to 31 GW installed capacity, Norway is among the world's largest hydropower producers. The majority of the hydro production capacity comes from regulated hydro power plants, and the large volumes imply that the supply of hydro power play a vital role in the price setting in the Nordic power market. In this study, we analyse the hydro scheduling decisions made by hydro producers based on historic observations. The objective is to quantify how different economic factors that are relevant in hydro scheduling have affected the actual hydro dispatch. The data consist of weekly observations of hydro generation as well as information on market drivers and factors affecting the water values. We estimate parameters for statistical models where the weekly hydro power generation is modelled as a function of the hydrological balance, inflow, temperature and the short term marginal costs for coal power generation. The current and expected power price are also included in alternative model specifications and we test for seasonal and regional differences in the supply response by estimating models that are specific for each season and for three different regions. The results show that both the hydro balance, inflow, temperature, short run marginal costs (SRMC) of coal power generation and power prices significantly affect the short run hydro power supply. We estimate an average increase in the weekly supply of 52 GWh when the hydro balance increases by 1 TWh for Norway in total. The estimated models have, in general, a good ability to predict the hydro power generation. The predictive power increases when regional models are applied. One main reason for this is the varying degree of regulation in the different regions. Overall, the results confirm that a major part of the variation in the weekly hydro power supply may be explained with a few, predicable determinants, and this knowledge may be utilized both by market participants and energy market modellers.