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Increasing the Value of Wind with Energy Storage

One economic disincentive to investing in wind generation is that the average market value of wind energy can be lower than that of other generation technologies. This is driven by the exercise of market power by other generators and the fact that the ability of these generators to exercise market power is inversely related to real-time wind availability. We examine the use of energy storage to mitigate this price suppression by shifting wind generation from periods with low prices to periods with higher prices. We show that storage can significantly increase the value of wind generation but the currently high capital cost of storage technologies cannot be justified on the basis of this use. Moreover, we demonstrate that this use of storage can reduce consumer surplus, the profits of other non-wind generators, and social welfare. We also examine the sensitivity of these effects to a number of parameters including storage size, storage efficiency, ownership structure, and market competitiveness--showing that a more-competitive market can make storage significantly more valuable to a wind generator.

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Energy Specializations: Electricity – Generation Technologies; Electricity – Markets and Prices ; Renewables – Wind

JEL Codes:
Q2 -
D42 - Market Structure, Pricing, and Design: Monopoly
Q51 - Valuation of Environmental Effects

Keywords: Wind generation, Energy storage, Electricity markets, Imperfect competition

DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No2-1

Published in Volume 32, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.