Publication Type

Journal Article

Publication Date

3-2016

Abstract

Electricity cannot yet be stored on a large scale, but technological advances leading to cheaper and more efficient industrial batteries make grid-level storage of electricity surpluses a natural choice. Because electricity prices can be negative, it is unclear how the presence of negative prices might affect the storage policy structure known to be optimal when prices are only non-negative, or even how important it is to consider negative prices when managing an industrial battery. For fast storage (a storage facility that can both be fully emptied and filled up in one decision period), we show analytically that negative prices can substantially alter the optimal storage policy structure, e.g., all else being equal, it can be optimal to empty an almost empty storage facility and fill up an almost full one. For more typical slow grid-level electricity storage, we numerically establish that ignoring negative prices could result in a considerable loss of value when negative prices occur more than 5% of the time. Negative prices raise another possibility: rather than storing surpluses, a merchant might buy negatively priced electricity surpluses and dispose of them, e.g., using load banks. We find that the value of such disposal strategy is substantial, e.g., about 118 $/kW-year when negative prices occur 10% of the time, but smaller than that of the storage strategy, e.g., about 391 $/kW-year using a typical battery. However, devices for disposal are much cheaper than those for storage. Our results thus have ramifications for merchants as well as policy makers.

Keywords

inventory, electricity storage, Markov decision process, asset pricing models, negative prices

Discipline

Operations and Supply Chain Management

Research Areas

Operations Management

Publication

Management Science

Volume

62

Issue

3

First Page

880

Last Page

898

ISSN

0025-1909

Identifier

10.1287/mnsc.2015.2161

Publisher

INFORMS

Additional URL

http://dx.doi.org/10.1287/mnsc.2015.2161

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