How is the water value determined?
To understand water values and how producers think, one must understand how the different seasons and weather uncertainties affect the water reservoirs. In spring and summer, the snow melts, and we fill up the water reservoirs. We call this the filling season. During autumn and winter, temperatures drop, consumption increases, and precipitation comes as snow. The reservoirs are no longer replenished, and producers start using the water they have saved. We call this the draining season. This is the main way hydropower producers distribute water throughout the year.
The big challenge is that no one knows for sure how much water the reservoirs will receive in the future or how much electricity we will use. Producers must consider factors such as the timing of snowmelt, precipitation, and temperature throughout the year. Therefore, they use statistics, forecasts, and models to make advanced mathematical calculations on production and consumption. This provides a basis for calculating the value of the water at any given time. The value depends on how long it is possible to store the water.
Why do we need water values?
Hydropower producers want to use the water during periods when the demand for power is highest, and prices are highest. For example, if a producer expects high consumption at a later time, it will be profitable to save water. Simply put, if producers set the water value too low, consumption increases, and this can lead to empty reservoirs before winter is over. This risks very high prices and rationing, which is not good for either producers or society.
Conversely, if the producer sets the water value too high throughout the season, it becomes expensive for the customer, and consumption decreases. Then producers are left with too much water when spring comes. More water must be released without producing power, which is also not good for producers or society.
By valuing the water in this way, hydropower plants ensure that there is always enough production, even when consumption is highest. This also ensures that the overall costs for society are the lowest.