PNNL

Abstract

A lack of large-scale economical storage, demand-side flexibility, and the need to instantaneously balance supply and demand cause challenges for electricity as a commodity. With typical commodities, stock from periods of high production can be stored and sold during low production, smoothing demand and supply shocks. In electricity markets, high storage costs have long outweighed benefits, negating convenience yield; no-arbitrage models do not apply, and typical hedging strategies cannot be performed due to infinite carry costs. However, the mechanics of energy trading are changing due to advancing storage technologies, more price-responsive demands, and virtual bidding in electricity markets, shaping a system where electricity storage can be valued on factors other than diurnal arbitrage. We examine the valuation of electricity storage through the lens of commodity markets to assess the impacts of large-scale storage deployment.