Intertemporal Arbitrage and Optimal Operation of Pumped Hydro Energy Storage

Isabel Figuerola-Ferretti and Eduardo S. Schwartz

No 35201, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Hydropower is a renewable and flexible energy source that provides essential storage capacity and enhances grid stability. Among storage technologies, pumped hydro energy storage (PHES) remains the most cost-effective solution for long-duration energy storage and plays a key role in power systems with increasing penetration of variable renewable energy. As electricity prices become more relevant under the energy transition, understanding the optimal operation and valuation of PHES assets is increasingly important from a financial perspective. This paper develops a market-based framework that models a PHES facility as a profit-maximizing asset operating in liberalized electricity markets. Using an optimal control approach calibrated with real life technical and operational parameters of the La Muela pumped storage plant and observed electricity prices from the Spanish wholesale market, the model derives an economically intuitive trigger (switching) price governing optimal pumping and generation decisions while accounting for reservoir water inventory dynamics and electricity price uncertainty. The results show that inventory dynamics and electricity price seasonality are central to PHES valuation and optimal operation.

JEL-codes: G19 (search for similar items in EconPapers)
Date: 2026-05
Note: AP
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