Electricity Trading and Negative Prices: Storage vs. Disposal

Yangfang (Helen) Zhou (), Alan Scheller-Wolf (), Nicola Secomandi () and Stephen Smith ()
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Yangfang (Helen) Zhou: Lee Kong Chian School of Business, Singapore Management University, Singapore 188065
Alan Scheller-Wolf: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213
Nicola Secomandi: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213
Stephen Smith: Robotics Institute, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213

Management Science, 2016, vol. 62, issue 3, 880-898

Abstract: Electricity cannot yet be stored on a large scale, but technological advances leading to cheaper and more efficient industrial batteries make grid-level storage of electricity surpluses a natural choice. Because electricity prices can be negative, it is unclear how the presence of negative prices might affect the storage policy structure known to be optimal when prices are only nonnegative, or even how important it is to consider negative prices when managing an industrial battery. For fast storage (a storage facility that can both be fully emptied and filled up in one decision period), we show analytically that negative prices can substantially alter the optimal storage policy structure, e.g., all else being equal, it can be optimal to empty an almost empty storage facility and fill up an almost full one. For more typical slow grid-level electricity storage, we numerically establish that ignoring negative prices could result in a considerable loss of value when negative prices occur more than 5% of the time. Negative prices raise another possibility: rather than storing surpluses, a merchant might buy negatively priced electricity surpluses and dispose of them, e.g., using load banks. We find that the value of such a disposal strategy is substantial, e.g., about $118 per kilowatt-year when negative prices occur 10% of the time, but smaller than that of the storage strategy, e.g., about $391 per kilowatt-year using a typical battery. However, devices for disposal are much cheaper than those for storage. Our results thus have ramifications for merchants as well as policy makers. This paper was accepted by Serguei Netessine, operations management .

Keywords: inventory; electricity storage; electricity disposal; Markov decision process; asset pricing models; negative prices (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (29)

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