Supply Function Equilibria in a Hydropower Market

The purpose of this working paper is to study the implications of market power in a hydropower based electricity market within the framework of the Supply Function Equilibria (SFE) model. We start by developing the standard SFE model with two symmetric players. We then develop a simple numerical example to illustrate the effects of production constraints both related to installed effect capacity and to energy capacity. We illustrate that binding constraints on energy production reduce the number of allowable supply functions.