Precautionary Storage in Electricity Markets

Tunç Durmaz

No 2016/5, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

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 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. Our analysis can have implications for inventory decisions in various other industries where firms face capacity constraints and are exposed to production risks.

Keywords: Precautionary energy storage; Intermittency; Renewable energy; Fossil fuel energy; Prudence; Frugality; Rational Expectations Equilibrium (search for similar items in EconPapers)
JEL-codes: D24 D41 D81 D84 Q41 Q42 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2016-02-25
New Economics Papers: this item is included in nep-ene and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Precautionary Storage in Electricity Markets (2016)
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