A Two-Part Tariff Model for Energy Intermediation

The proliferation of intermittent and distributed sources of power generation leads to potential instability of the utility grid. The unforecastability of weather patterns, cloud cover, and the like and the consequent unpredictability of output from such sources as wind farms and solar power plants aggravate the situation created by unpredictable consumer demand for power. Energy storage has been increasingly seen as a crucial element in resolving the challenge and several electrical, chemical, and mechanical systems have been analyzed. On occasion, storing a unit of electric power could cost more than generating one. This article argues that investments in energy storage should be justified on a stand-alone basis. Trading margins alone are found insufficient to justify economic investments in storage facilities. To sustain investor interest in the long run, such facilities would have to bank and trade energy along the lines of mainstream commercial banks and earn economic profits comparable to alternative applications of funds. This article discusses an economic model involving a two-part tariff: an option price and a trading margin from energy time-shifting.