Decentralizing hydro power production

We analyse the production of electricity from n power stations in a dynamic model. Each power station's production of electricity is constrained by the quantity of water available to it (supply constraint) as well as limitations on reservoir capacity (storage constraint). We show that hydro power production can lead to two sources of welfare loss: suboptimal management of water resources and the exercise of market power. A monopolist minimizes the first source of inefficiency, whereas decentralized production in a competitive environment minimizes the second. The decision to introduce competition in hydropower production must account for these two opposite effects.