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Optimal trading with regime switching: Numerical and analytic techniques applied to valuing storage in an electricity balancing market

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  • Johnson, Paul
  • Szabó, Dávid Zoltán
  • Duck, Peter

Abstract

Accurately valuing storage in the electricity market recognizes its role in enhancing grid flexibility, integrating renewable energy, managing peak loads, providing ancillary services and improving market efficiency. In this paper we outline an optimal trading problem for an Energy Storage Device trading on the electricity balancing (or regulating) market. To capture the features of the balancing (or regulating) market price we combine stochastic differential equations with Markov regime switching to create a novel model, and outline how this can be calibrated to real market data available from NordPool. By modelling a battery that can be filled or emptied instantaneously, this simplifying assumption allows us to generate numerical and quasi analytic solutions.

Suggested Citation

  • Johnson, Paul & Szabó, Dávid Zoltán & Duck, Peter, 2024. "Optimal trading with regime switching: Numerical and analytic techniques applied to valuing storage in an electricity balancing market," European Journal of Operational Research, Elsevier, vol. 319(2), pages 611-624.
    • Handle: RePEc:eee:ejores:v:319:y:2024:i:2:p:611-624
    DOI: 10.1016/j.ejor.2024.06.026
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