Hydropower with Financial Information∗

We consider a single utility company’s long- and medium-term hydropower planning. The uncertainties are from the electricity forward curve and a random inflow. We give a simple and intuitive parameterization for the optimal production strategy. The accuracy of the parameterization is analyzed by comparing its expected cash flows to the corresponding upper bound. In our testing case we compare our method with the realized production strategy of a Norwegian hydropower producer during winters 1997-2003. During these years the parameterization gives earnings that are within 2.6 % from the theoretical upper bound. Further, the results illustrate that a significant part of the actual production strategy can be explained with our method. This suggests that the information from electricity derivative markets is used in the production optimization. Key words: Electricity forward curve, hydropower productio