The production side of the market for hydroelectricity can be described as typical and very similar to other markets in other economic sectors in that it is affected by gains in technology and other factors to increase productivity. There are many methods electricity suppliers use to produce electricity. However, hydroelectricity is still a unique way of producing electricity, with some potential ecological benefits, compared to using sources of energy creation like wind, nuclear or even coal.
Hydroelectric power does not have the potential external costs like emitting greenhouse gases, that of course, heat the planet up and lead to habitat destruction, like the destruction of coral reefs and even glaciers. For instance, when the planet warms up there is the potential for more hurricanes to develop simply because the oceans are warmer. Of course, there are some external costs. The massive displacement of people due to the creation of reservoirs, wildlife affects, and potential losses from catastrophic failure should also be factored in. However, many times these external costs can be mitigated through creating large state parks, as is the case for Lake Seminole, located in the Florida Panhandle, for everyone to enjoy. Water that is stored in Lake Seminole actually helps create an environment for fish species and other endangered wildlife as well as provided recreational opportunities for people. Obviously, the most important asset for hydroelectricity suppliers, in terms of producing electricity, is water. Rainfall results in more water to be stored in dam reservoirs, which then can be used to generate electricity.
Electricity is a commodity that should follow the Laws of Supply and Demand like any other good. The problem is that the rates paid by customers from energy suppliers don't always reflect the demand customers are willing to pay during a peak demand time frame. The best way to describe the issue with the inefficiency of the market for electricity is by explaining Price Elasticity. Let's take a simple example for calculating Price Elasticity for a good from a different market altogether, For instance, Play Station Games in 2007 dropped the price for their Play Station III game from 9 to 9. Sales increased from 1.4 million to 2.8 million. Using the Arc Price Elasticity of Demand method reveals a positive Price Elasticity of Demand of 7.32. This means that when the price is lowered from 9 to 9 consumers are sensitive to this change in price for PlayStation III games.
Needless to say, if the cost of electrical rates increases or decreases throughout the daytime, the demand for electricity would fall and rise throughout this time period, that is, if consumption of electricity were to be truly price elastic, like the PlayStation III game. Perhaps technological innovations will be created one day that will enable all electricity users to pay electrical rates for the real time market price of real time use, thus, helping make energy market more efficient. Besides the market inefficiency explained above that is typical to the energy market as a whole, hydroelectric power is still the best source of power if its potential external costs are mitigated correctly by creating needed public parks or preservation areas for endangered wildlife.
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