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Merchant Storage Investment in a Restructured Electricity Industry
Stockholm University, Faculty of Social Sciences, Department of Computer and Systems Sciences. University College London, UK; HEC Montréal, Canada.
Number of Authors: 32019 (English)In: Energy Journal, ISSN 0195-6574, E-ISSN 1944-9089, Vol. 40, no 4, p. 129-163Article in journal (Refereed) Published
Abstract [en]

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.

Place, publisher, year, edition, pages
2019. Vol. 40, no 4, p. 129-163
Keywords [en]
Energy storage, Bi-level modelling, Market power
National Category
Economics and Business Environmental Engineering
Identifiers
URN: urn:nbn:se:su:diva-170830DOI: 10.5547/01956574.40.4.asidISI: 000471656700006OAI: oai:DiVA.org:su-170830DiVA, id: diva2:1339380
Available from: 2019-07-29 Created: 2019-07-29 Last updated: 2019-07-29Bibliographically approved

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CiteExportLink to record
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Citation style
  • apa
  • ieee
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  • Other style
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  • de-DE
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  • en-US
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  • nn-NO
  • nn-NB
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Output format
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  • asciidoc
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