EMK:Water Values in the EMarket Model

Water Values Defined

The concept of a water value is useful to an owner of some hydro electric generation which has some storage because it tells the owner exactly how much the next MWh of generation is worth at any point in time. Knowing this, the owner could offer their hydro generation into a spot market, for example.

Alternatively, if the owner operated an entire utility which had both hydro and thermal plant, then they could establish a place for the hydro in their "merit order", more simply the order in which the plant should be dispatched given its marginal cost of generation. The assumption here is, of course, that cheaper plant has more merit than expensive plant and should therefore be dispatched first.

The marginal cost of thermal plant is made up of fuel and other variable costs of generation. Hydro electric plant has either small or negligible marginal costs, so the water value is effectively an opportunity cost of operation – this occurs because a MWh of hydro electricity can, in principle, displace a MWh of thermal generation.

Two key characteristics of hydro electric schemes tightly govern what the owner may do with the scheme. One is that storage is limited and the other is that inflows are finite. Hydro generators have strictly limited supplies of water with which to generate.

Consequently, at any particular point in time, the hydro owner must decide if they use water in storage to generate now, or store it longer to use later. Thus the water value can be thought of as the expected future value of water in storage. The hydro owner should take the opportunity to generate whenever the nodal price received for generation is equal to or exceeds the water value.

Although we talk of water value, more correctly we should refer to marginal water value, which is defined as the expected future value of the next cubic meter of water arriving as storage for generation. This implies that the water value should be expressed, for example, in dollars per cubic meter of water. In practice, however, it is more convenient to express it in $/MWh.

Water Value Contours

Figure 1 - Huntly Operating Guideline

The useful concept of the "operating guideline" arose from the development of various models for ECNZ in New Zealand. An operating guideline is a curve on a chart of total storage for the reservoir in question versus time. The guideline establishes the hydro generator's place in the merit order at any given time of the year.

For example, the Huntly operating guideline shown, for any given time of year, the storage level at which Huntly should be operating, assuming a centrally planned system. At any time during the year Huntly should operate if storage is at or below the thick black operating guideline. In practice, Huntly actually would come on progressively over a range of storage around the guideline. In addition, ECNZ's models calculated guidelines for all major thermal plant based on storage in the two islands.

Figure 2 - Waitaki Water Value Example

Another way to think of the operating guideline is a curve joining points of equal water value – in this case the value of generation from Huntly. Thus, by definition, an operating guideline is a (marginal) water value contour. In designing EMarket, Energy Link decided to continue with the concept of an operating guideline because it is a useful way of visualizing how water value changes with storage and time.

The chart to the left shows typical water value contours for water in the big storage lakes of the Waitaki hydro electric system, Lakes Pukaki and Tekapo, as produced by EMarket. Each contour relates to the offer band from a thermal generator modeled in EMarket. At any given time in the year, if storage is exactly on a contour then it is obvious what it's water value is. If storage is between two contours then the water value is linearly interpolated between the two contours. For example, if storage is one third of the way between two contours of $50/MWh contour and $75/MWh, respectively, then the water value is simply

2/3 x 50 + 1/3 x 75 = $58.33 / MWh