A closed loop stochastic game model of the Nordic electricity market

We investigate the potential for market power in the Scandinavian electricity market through a stochastic game model. Cournot competition is assumed. We examine the optimal hydro and forward strategies when producers take into account the commitment effect of these decisions. Due to the complexity of this type of problem, we only model two stages. In the first stage producers decide on forward contracting and thermal, nuclear and hydro generation for the current spot market. In the second stage, they learn about water inflows to reservoirs before deciding on generation for the second stage spot market. We find that large pure hydro producers have little or no incentives to spill water in order to increase prices, and that the largest producer, Vattenfall, has some incentive to withdraw capacity from the market.