How Options Provided by Storage Affect Electricity Prices

Lewis Evans and Graeme Guthrie

Southern Economic Journal, 2009, vol. 75, issue 3, 681-702

Abstract: Generators supplying electricity markets are subject to volatile input and output prices and uncertain fuel availability. We show that a price‐taking generator will generate only when the output price exceeds its operational marginal cost by the value of the option to delay the use of stored fuel. This option value, which is an increasing function of spot price volatility and the uncertainty about fuel availability, must be considered when evaluating whether market power is present in electricity markets. We calibrate our model to the California electricity market and show the implications of Hurricane Katrina for generators' offers. The standard approach for simulating electricity supply curves for use in market power evaluations just uses operational marginal cost. Our work demonstrates that operational marginal cost is a lower bound for total short‐run marginal cost and may considerably underestimate actual short‐run marginal cost even in the complete absence of market power.

Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://doi.org/10.1002/j.2325-8012.2009.tb00926.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:75:y:2009:i:3:p:681-702

Access Statistics for this article

More articles in Southern Economic Journal from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().