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Both wind and hydro are price takers in a market system, however while wind is a volatile power source ~ "use it or lose it", hydro is a dispatchable power source.

So while they are both price takers, hydro can choose when and where it takes the going price. Indeed, in a pure market setting, it ought to take the prospective future prices that it may be able to take into account when it decides whether to generate and if so how much to generate.

In an small country open economy context, where there is a broad export market that can take up surplus production, that means that on the same gross annual energy production, this ability to cherry pick strong price periods means that hydro is financially viable at a higher average price than wind is financially viable, and so that despite its high fixed cost component, it can survive on a higher cost basis than a volatile power source such as wind can.

The same logic applies, of course, its just that hte ability to cherry pick the prices to take means that the logic applies at a larger hydro capacity, and in many instances a country will run out of high quality dammed hydro sites to exploit before they run out of ability of the power grid to absorb hydro capacity without prices dropping below the rates that will refund the capital cost.

Note that run-of-river hydro, unlike conventional dammed hydro, is a volatile rather than dispatchable power source, so it is in general in the exact same boat as wind.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Mar 28th, 2011 at 08:17:29 PM EST
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