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Optimal Storage, Investment and Management under Uncertainty: It is Costly to Avoid Outages!

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  • Joachim Geske and Richard Green

Abstract

We show how electricity storage is operated optimally when the load net of renewable output is uncertain. We estimate a diurnal Markov-process representation of how Germany's residual load changed from hour to hour and design a simple dynamic stochastic electricity system model with non-intermittent generation technologies and storage. We derive the optimal storage, generator output and capacity levels. If storage capacity replaces some generation capacity, the optimal storage strategy must balance arbitrage (between periods of high and low marginal cost) against precautionary storage to ensure energy is available throughout a long peak in net demand. Solving the model numerically under uncertainty (only the transition probabilities to future loads are known), we compare the results to perfect foresight findings. The latter over-estimate the cost-saving potential of energy storage by 27%, as storage can take up arbitrage opportunities that would not be chosen if there was a need for precautionary storage.

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  • Joachim Geske and Richard Green, 2020. "Optimal Storage, Investment and Management under Uncertainty: It is Costly to Avoid Outages!," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-28.
    • Handle: RePEc:aen:journl:ej41-2-green
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    1. Simonsen, Ingve & Weron, Rafal & Mo, Birger, 2004. "Structure and stylized facts of a deregulated power market," MPRA Paper 1443, University Library of Munich, Germany.
    2. Möst, Dominik & Keles, Dogan, 2010. "A survey of stochastic modelling approaches for liberalised electricity markets," European Journal of Operational Research, Elsevier, vol. 207(2), pages 543-556, December.
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    Cited by:

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    5. Reinhard Haas & Claudia Kemfert & Hans Auer & Amela Ajanovic & Marlene Sayer & Albert Hiesl, 2022. "On the economics of storage for electricity: Current state and future market design prospects," Wiley Interdisciplinary Reviews: Energy and Environment, Wiley Blackwell, vol. 11(3), May.
    6. Richard Schmalensee, 2022. "Competitive Energy Storage and the Duck Curve," The Energy Journal, , vol. 43(2), pages 1-16, March.
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    9. Albert Hiesl & Amela Ajanovic & Reinhard Haas, 2020. "On current and future economics of electricity storage," Greenhouse Gases: Science and Technology, Blackwell Publishing, vol. 10(6), pages 1176-1192, December.
    10. Gorman, Will & Montañés, Cristina Crespo & Mills, Andrew & Kim, James Hyungkwan & Millstein, Dev & Wiser, Ryan, 2022. "Are coupled renewable-battery power plants more valuable than independently sited installations?," Energy Economics, Elsevier, vol. 107(C).
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    12. Antweiler, Werner, 2021. "Microeconomic models of electricity storage: Price Forecasting, arbitrage limits, curtailment insurance, and transmission line utilization," Energy Economics, Elsevier, vol. 101(C).

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