Utility-scale energy storage in an imperfectly competitive power sector

• Published in: Energy economics 2020-05, Vol.88, p.104716, Article 104716
• Main Authors: Virasjoki, Vilma, Siddiqui, Afzal S., Oliveira, Fabricio, Salo, Ahti
• Format: Article
• Language: English
• Subjects: Arbitrage; Case studies; Competition; Computer and Systems Sciences; Consumers; data- och systemvetenskap; Economic conditions; Economics; Electric power generation; Energy economics; Energy policy; Energy sources; Energy storage; Industrial markets; Investment; Investments; Investors; Market power; Markets; Oligopoly; Optimization; Policy making; Power; Power market modeling; Profitability; Renewable energy; Renewable energy sources; Social power; Storage; Storage capacity; Storage systems; Sustainability; Variable renewable energy; Welfare
• ISSN: 0140-9883; 1873-6181; 1873-6181
• DOI: 10.1016/j.eneco.2020.104716

Interest in sustainability has increased the share of variable renewable energy sources (VRES) in power generation. Energy storage systems' potential to mitigate intermittencies from non-dispatchable VRES has enhanced their appeal. However, the impacts of storage vary based on the owner and market conditions. We examine the policy implications of investments in utility-scale battery storage via a bi-level optimization model. The lower level depicts power system operations, modeled as either perfect competition or Cournot oligopoly to allow for the assessment of producer market power. The upper-level investor is either a welfare-maximizer or a profit-maximizing standalone merchant to reflect either welfare enhancement or arbitrage, respectively. We implement a realistic case study for Western Europe based on all possible size-location storage investment combinations. We find that market competition affects investment sizes, locations, and their profitability more than the investor's objectives. A welfare-maximizer under perfect competition invests the most in storage capacity. Consumers typically gain most from storage investments in all cases, exceeding the gains for the investors. Specifically, our results show that storage investments may either not occur or be located differently than at social optimum, if market power is exerted. Thus, policy makers need to anticipate producer market power when setting regulation. •Energy storage can support renewable energy and generate revenue via arbitrage.•We formulate a bi-level model for optimal storage investment sizes and locations.•Five configurations for the market's competitiveness and investors are modeled.•An imperfectly competitive market affects investments more than the investor type.•Consumers are the typical beneficiaries of new storage investments.