How much hydropower should the government own?

<p>Many countries have decentralised previously highly regulated electricity generation markets. The literature studying these markets has raised concerns regarding the potential for exploitation of market power. We study a mixed market in which ownership of hydropower is split between private and public firms. A central planner allocates water between the two hydropower firms, trading off the productive inefficiency of the public firm and the exploitation of market power by the private firm. If demand, over time, is either close to uniform, or exceptionally variable, then the public firm serves no value. However, between these extremes, the central planner allocates water to both firms. In this range we find the public firm can offset enough of the effects of market power that a mixed market achieves superior welfare outcomes to a model of full private ownership.</p>