EURO 2024 Copenhagen
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1690. Water as a commodity in hydropower generation

Invited abstract in session MC-63: Natural Resource Management and Commodity Markets, stream OR in Banking, Finance and Insurance: New Tools for Risk Management.

Monday, 12:30-14:00
Room: S14 (building: 101)

Authors (first author is the speaker)

1. Isabel Figuerola-Ferretti
Universidad Ponticficia Comillas
2. Eduardo Schwartz
Anderson School, UCLA

Abstract

The increased impact of extreme weather events and draughts has prompted
the rapid growth of the water market. This paper analyzes the optimal operation of a reservoir that generates electricity and manages the water by
trading water rights. We extend the framework introduced in a recent paper by Figuerola Ferretti, Schwartz, and Segarra (2023) to include the water
price process in a model that accounts for water inventory and the electricity
price as two independent price processes. The model is implemented under
the stochastic optimal control approach and calibrated using monthly data
for a reservoir in the estate of California. The water price dynamics includes the dependence on the California Drought Severity Index. Results show that the underlying water and electricity price dynamics exhibit a high degree of uncertainty and seasonality. They also demonstrate that, under the calibrated model parameters on average for the parameters used, around 25% of the revenue generated by the reservoir arises from the revenue obtained from selling water rights. The water contribution to revenue generation would increase under enhanced severity of climate change.

Keywords

Status: accepted

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