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Merchant Storage Investment in a Restructured Electricity Industry

Author

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  • Afzal S. Siddiqui
  • Ramteen Sioshansi
  • Antonio J. Conejo

Abstract

Restructuring and liberalisation of the electricity industry creates opportunities for investment in energy storage, which could be undertaken by a profit-maximising merchant storage operator. Because such a firm is concerned solely with maximising its own profit, the resulting storage-investment decision may be socially suboptimal (or detrimental). This paper develops a bi-level model of an imperfectly competitive electricity market. The modelling framework assumes electricity-generation and storage-operations decisions at the lower level and storage investment at the upper level. Our analytical results demonstrate that a relatively high (low) amount of market power in the generation sector leads to low (high) storage-capacity investment by the profit-maximising storage operator relative to a welfare maximiser. This can result in net social welfare losses with a profit-maximising storage operator compared to a no-storage case. Moreover, there are guaranteed to be net social welfare losses with a profit-maximising storage operator if the generation sector is sufficiently competitive. Using a charge on generation ramping between off- and on-peak periods, we induce the profit-maximising storage operator to invest in the same level of storage capacity as the welfare-maximising firm. Such a ramping charge can increase social welfare above the levels that are attained with a welfare-maximising storage operator.

Suggested Citation

  • Afzal S. Siddiqui & Ramteen Sioshansi & Antonio J. Conejo, 2019. "Merchant Storage Investment in a Restructured Electricity Industry," The Energy Journal, , vol. 40(4), pages 129-164, July.
    • Handle: RePEc:sae:enejou:v:40:y:2019:i:4:p:129-164
    DOI: 10.5547/01956574.40.4.asid
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    References listed on IDEAS

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    1. MURPHY, Frédéric & SMEERS, Yves, 2010. "On the impact of forward markets on investments in oligopolistic markets with reference to electricity," LIDAM Reprints CORE 2216, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    3. Richard Green & Nicholas Vasilakos, 2012. "Storing Wind for a Rainy Day: What Kind of Electricity Does Denmark Export?," The Energy Journal, , vol. 33(3), pages 1-22, July.
    4. Wolf-Peter Schill & Claudia Kemfert, 2011. "Modeling Strategic Electricity Storage: The Case of Pumped Hydro Storage in Germany," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 59-88.
    5. Frederic Murphy & Yves Smeers, 2010. "On the Impact of Forward Markets on Investments in Oligopolistic Markets with Reference to Electricity," Operations Research, INFORMS, vol. 58(3), pages 515-528, June.
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    Cited by:

    1. Milstein, I. & Tishler, A. & Woo, C.K., 2024. "The effect of PV generation's hourly variations on Israel's solar investment," Energy Economics, Elsevier, vol. 136(C).

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