Hydro Reservoir and Water Value
Water in a hydro reservoir is an inventory with an option value: using it today precludes future generation.
Hydro reservoirs turn water inflows into dispatchable power subject to capacity, environmental, and operating limits.
Water value is the shadow price of stored water: the opportunity cost of using one more unit now instead of later.
Optimising hydro generation is a stochastic control problem over prices, inflows, and constraints, not a static payoff.
This sketch shows a hydro reservoir with inflows, releases, and spills against a power price path and a water-value threshold. Expected inflow controls how quickly the reservoir fills and how aggressively you must release water to avoid spilling.
Higher expected inflows push the reservoir path upwards. If capacity and release limits are too small, extra water must be used early or is lost as spill.
Water value is the opportunity cost of stored water. When prices exceed this threshold, releasing now is attractive; when prices are below it, keeping water for future high-price periods is better. The hydro scheduling problem is to balance these two forces under inflow and capacity uncertainty.