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Merchant Storage Investment in a Restructured Electricity Industry

Author

Listed:
  • Afzal S. Siddiqui
  • Ramteen Sioshansi
  • Antonio J. Conejo

Abstract

Restructuring and liberalisation of the electricity industry creates opportunities for investment in energy storage, which could be undertaken by a profit-maximising merchant storage operator. Because such a firm is concerned solely with maximising its own profit, the resulting storage-investment decision may be socially suboptimal (or detrimental). This paper develops a bi-level model of an imperfectly competitive electricity market. The modelling framework assumes electricity-generation and storage-operations decisions at the lower level and storage investment at the upper level. Our analytical results demonstrate that a relatively high (low) amount of market power in the generation sector leads to low (high) storage-capacity investment by the profit-maximising storage operator relative to a welfare maximiser. This can result in net social welfare losses with a profit-maximising storage operator compared to a no-storage case. Moreover, there are guaranteed to be net social welfare losses with a profit-maximising storage operator if the generation sector is sufficiently competitive. Using a charge on generation ramping between off- and on-peak periods, we induce the profit-maximising storage operator to invest in the same level of storage capacity as the welfare-maximising firm. Such a ramping charge can increase social welfare above the levels that are attained with a welfare-maximising storage operator.

Suggested Citation

  • Afzal S. Siddiqui & Ramteen Sioshansi & Antonio J. Conejo, 2019. "Merchant Storage Investment in a Restructured Electricity Industry," The Energy Journal, , vol. 40(4), pages 129-164, July.
    • Handle: RePEc:sae:enejou:v:40:y:2019:i:4:p:129-164
    DOI: 10.5547/01956574.40.4.asid
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    References listed on IDEAS

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    1. MURPHY, Frédéric & SMEERS, Yves, 2010. "On the impact of forward markets on investments in oligopolistic markets with reference to electricity," LIDAM Reprints CORE 2216, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Frederic Murphy & Yves Smeers, 2010. "On the Impact of Forward Markets on Investments in Oligopolistic Markets with Reference to Electricity," Operations Research, INFORMS, vol. 58(3), pages 515-528, June.
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