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Precautionary Storage in Electricity Markets

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  • Tunç Durmaz

    (SEE City University of Hong Kong)

Abstract

As renewable energy depends on meteorological shocks and is non-controllable, the overall energy production becomes riskier with the rising renewable share. Although this has led to a renewed interest in storage technologies, not much consideration has been given to energy storage due to precautionary motives. In our study, we look at to what extent a convex marginal utility (prudence) and a convex marginal cost (frugality) can spur precautionary energy storage. We set up a simple theoretical model of energy consumption and production with intermittent renewable sources, dispatchable thermal systems, and energy storage. First, we characterize the optimum and demonstrate how prudence and frugality can lead to higher levels of energy storage. By applying our findings to perfectly competitive markets, we further show that prudence and frugality increase the market energy price through higher demand for energy storage and decrease price volatility. The results present important lessons about the direct and indirect impacts precautionary motives can have on electricity prices and energy generation decisions.

Suggested Citation

  • Tunç Durmaz, 2016. "Precautionary Storage in Electricity Markets," Working Papers 2016.07, FAERE - French Association of Environmental and Resource Economists.
    • Handle: RePEc:fae:wpaper:2016.07
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    Cited by:

    1. Dato, Prudence & Durmaz, Tunç & Pommeret, Aude, 2020. "Smart grids and renewable electricity generation by households," Energy Economics, Elsevier, vol. 86(C).
    2. Tunç Durmaz & Aude Pommeret & Ian Ridley, 2017. "Willingness to Pay for Solar Panels and Smart Grids," Working Papers 2017.24, Fondazione Eni Enrico Mattei.
    3. Prudence Dato & Tun Durmaz & Aude Pommeret, 2017. "Intermittent renewable electricity generation with smart grids," Working Papers 2017.09, FAERE - French Association of Environmental and Resource Economists.

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    More about this item

    Keywords

    Precautionary energy storage; Intermittency; Renewable energy; Prudence; Frugality;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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