The Value of Hydropower as a Grid-Scale Storage Resource: A Commodity Market Approach

Brittany Tarufelli, James Gibson, Sarah Barrows, Abhishek Somani and Daniel Boff

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Abstract: Grid-scale energy storage enhances power system performance by shifting loads and supporting capacity, reliability, and transmission. However, as storage penetration increases, arbitrage opportunities—and associated profits—decline (Sioshansi et al., 2009; Li et al., 2024). In ERCOT, for example, 2024 saw reduced arbitrage due to moderate weather and expanded storage. This trend contrasts with findings that long-duration storage is essential for reliability and affordability (Blair et al., 2022), suggesting the need for new business models to capture storage’s full value. Despite growing deployment in energy storage, empirical research on storage’s value remains limited. To address this gap, we develop a commodity-market-based framework and apply it to hydropower as a grid-scale storage resource. Using exogenous variation in reservoir storage volume as a proxy for energy storage, we estimate its causal effect on risk premiums—measured by the day-ahead to real-time price spread—in the Northwestern United States between May 2022 and November 2024. Employing fixed effects and lagged dependent variable models, we control for time-invariant heterogeneity across balancing authorities and account for dynamic price behavior. We find that a 10% increase in reservoir storage volume reduces risk premiums by 5%, indicating that hydropower reservoir storage mitigates short-term supply-demand imbalances. Our results are robust to dynamic pricing effects and suggest that storage is especially valuable during grid stress events, with pronounced impacts at the upper end of the price distribution. This result indicates that reservoir storage may be more valuable during grid stress events. As most markets lack compensation mechanisms for stored energy, our findings offer empirical support for designing future models that better reflect the risk-reducing benefits of grid-scale storage.

Date: 2025-10-17
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:osf:socarx:bm5jf_v1

DOI: 10.31219/osf.io/bm5jf_v1

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