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Contract Design for Storage in Hybrid Electricity Markets

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  • Billimoria, F.
  • Simshauser, P.

Abstract

Challenges to the term financing of standalone storage in energy-only electricity markets relate to the difficulty of obtaining long-tenor contracts given multiple volatile revenue streams. Government and central agency-initiated contracting and procurement of storage has garnered interest as a means of catalysing adoption and learning curve effects, particularly given the required scale and pace of the decarbonisation objective. Given the complexity of storage operations and multiple streams of value, standard contract forms are yet to emerge. While there is flexibility in the design of forward contract arrangements, flow on effects of design on incentive compatibility in dispatch, risk-trading and investment represent a critically important avenue of investigation. This article establishes six principles for government-initiated contracting and examines the incentive compatibility of storage contract designs. We find that that preferences for structural simplicity in contract design could introduce incentive incompatibility without careful consideration of the interactions between storage operations and investment.

Suggested Citation

  • Billimoria, F. & Simshauser, P., 2023. "Contract Design for Storage in Hybrid Electricity Markets," Cambridge Working Papers in Economics 2322, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2322
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    1. Tom Brijs & Daniel Huppmann & Sauleh Siddiqui & Ronnie Belmans, 2016. "Auction-Based Allocation of Shared Electricity Storage Resources through Physical Storage Rights," Discussion Papers of DIW Berlin 1566, DIW Berlin, German Institute for Economic Research.
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    4. Billimoria, Farhad & Poudineh, Rahmatallah, 2019. "Market design for resource adequacy: A reliability insurance overlay on energy-only electricity markets," Utilities Policy, Elsevier, vol. 60(C), pages 1-1.
    5. Gohdes, Nicholas & Simshauser, Paul & Wilson, Clevo, 2022. "Renewable entry costs, project finance and the role of revenue quality in Australia's National Electricity Market," Energy Economics, Elsevier, vol. 114(C).
    6. Simshauser, Paul, 2020. "Merchant renewables and the valuation of peaking plant in energy-only markets," Energy Economics, Elsevier, vol. 91(C).
    7. Gauthier DE MAERE D’AERTRYCKE & Andreas EHRENMANN & Yves SMEERS, 2017. "Investment with incomplete markets for risk: the need for long-term contracts," LIDAM Reprints CORE 2849, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. Dharik S. Mallapragada & Cristian Junge & Cathy Xun Wang & Johannes Pfeifenberger & Paul L. Joskow & Richard Schmalensee, 2021. "Electricity Price Distributions in Future Renewables-Dominant Power Grids and Policy Implications," NBER Working Papers 29510, National Bureau of Economic Research, Inc.
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    10. Billimoria, Farhad & Fele, Filiberto & Savelli, Iacopo & Morstyn, Thomas & McCulloch, Malcolm, 2022. "An insurance mechanism for electricity reliability differentiation under deep decarbonization," Applied Energy, Elsevier, vol. 321(C).
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    Cited by:

    1. Paul Simshauser & David Newbery, 2023. "Non-firm vs. priority access: on the long run average and marginal cost of renewables in Australia," Working Papers EPRG2322, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.

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    Keywords

    Electricity markets; risk trading; project finance; renewables; energy storage;
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