Hydropower economics: An overview

Electricity produced by hydropower is an important source of renewable energy. Hydropower is often termed green energy because its production does not generate harmful emissions. However, the main environmental problem is the exploitation of hydropower sites as such. There may also be current environmental problems due to the change in the reservoir level and the amount of water downstream. There may be emission of methane gases in dams when flooded plants are rotting in the water. This article focuses on a few unique features of hydroelectricity production in detail and then briefly mentions other interesting topics. There is a huge engineering literature in the form of journal papers and books, but a relatively sparse literature based on economics. The common theme will be optimal management of existing production capacities. A fundamental feature of managing hydropower is that the analysis must be dynamic: water used today may alternatively be used tomorrow. This is the starting point for developing dynamic analysis of optimal reservoir management. Bellman’s principle of backward induction is applied in a very simple way. Main conclusions are illustrated using innovative bathtub diagrams.