This Thesis deals with the management of a mixed hydro-thermal system in a competitive electricity market. A notable feature of our market is the presence of long term financial contracts, or options. We model the energy spot market as a Cournot oligopoly, with a non-competitive fringe. The data from the Cournot model is used in an optimisation model based on Dual Dynamic Programming (DDP). The optimisation model produces operating rules in the form of a marginal water value surface, and these rules guide our medium term simulation model.

We develop a method for using the Cournot model to produce Demand Curves for Release, which describe the amount of water the hydro manager would want to release in a given period for a range of marginal water values (prices). We show how DDP can be thought of as a process of adding demand curves over time, equating marginal costs between periods.

We find that the efficiency of the market is greatly influenced by the size of the contracts, and to a lesser extent by the portfolio of plant that each of the firms has. Increasing contracts lead to increasing output, decreasing spot prices, decreasing profit, increasing consumer surplus, decreasing marginal water values, and increasing storage trajectories. With appropriate choice of contracts the market can be made to mimic perfect competition.