Water Values and Hydro Offers
Disclaimer
Reasonable care has been taken to ensure that the information in this paper is up to date at the time of issue. Potential users of EMarket should, however, ensure that they evaluate EMarket and this paper through an appropriate evaluation process in consultation with Energy Link. The authors are also reliant on certain information external to EMarket and Energy Link, for which no liability or responsibility can be accepted.
Introduction
This technical bulletin is intended to provide users and interested parties with a detailed explanation of how EMarket’s water values are calculated and applied. EMarket was designed as a market simulation model rather than as an operational model and the algorithm developed by Energy Link for use in EMarket was designed to give a high degree of accuracy at high speed for this purpose. Speed of operation is a strength of EMarket and ensures that users can turn new or modified simulations around very quickly, achieving high levels of productivity.
EMarket is also a very flexible model which allows, for example, simulation runs to combine weekly, day-night and half hourly dispatches within one simulation run. This paper includes a brief overview of other features in EMarket.
Other Documents
This bulletin is one of a series of technical bulletins relating to Energy Link’s EMarket model. Taken together, the bulletins replace the old EMarket User Guide. The full series of bulletins covers an overview of the EMarket model, the details of the four major New Zealand hydro systems modelled in EMarket, water values and hydro offers, power flows, dispatch and nodal pricing, short term river chain optimisation and company optimisation.
Summary
The manager of a hydro system in New Zealand must deal with the prospect of uncertain inflows, concern about ensuring security of supply in a dry year, and how to maximise the value of water in the reservoir at any point in the year.
The concept of a marginal water value is useful in this context and defines the expected future value of the next cubic meter of water arriving in storage for generation. The water values calculated by EMarket and used in its full simulation runs are stored and viewed as water value contours, or curves of constant water value on a chart of storage versus time. Contour values are chosen to match the offer prices of thermal plant configured in each run.
EMarket’s water values have the following property: if the contour price is Pc then if the inflow scenarios entered into EMarket are projected forward using market dispatch with hydro offers at the constant value Pc, the number of scenarios that hit the bottom of the reservoir is equal to 
where F is the number of annual inflow scenarios entered into EMarket, N the security factor defined by the 1 in N security criterion used in New Zealand, and P the average nodal price for the simulation run.
If the water value is equal to P and if F = N then the number of inflow scenarios which will hit bottom of the reservoir when projected forward using market dispatch and constant offer price P, is equal to 1.
EMarket’s water values are calculated very quickly using a much simplified, weekly version of the full simulation run which does not use nodal dispatch and pricing. During the full simulation run the water values are adjusted using relative prices across the grid to ensure that the hydros offer their output at a price consistent with the optimum release at any particular time of year and storage value.
The offers of the major hydro systems modelled in EMarket can also be distributed optimally across injection nodes along their respective hydro systems, thus providing accurate modelling of nodal prices, losses and line constraints within and around the major hydro systems.
Water Values Defined
The concept of a water value is useful to the manager of hydro electric generation which has some storage because it tells the manager exactly how much the next MWh of generation is worth at any point in time. Knowing this, the manager could offer their hydro generation into a spot market, for example, at water value, and be dispatched more or less in order of offer price (The actual order depends also on the method used for dispatch. In New Zealand, and in many other electricity markets, nodal (or locational marginal) dispatch and pricing are used which also takes into account marginal losses and line constraints during dispatch).
Alternatively, if the manager 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.
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 in 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 of generation output.
Consequently, at any particular point in time, the hydro manager must decide if they use water in storage to generate now, or store it longer to use later. The hydro manager should take the opportunity to generate whenever the nodal price received for generation is equal to or exceeds the water value.
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 – water used to generate now will not be available to generate later when we expect to obtain its current water value for generation from the hydro system.