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.
