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Modeling Strategic Electricity Storage: The Case of Pumped Hydro Storage in Germany

Abstract:
We study the strategic utilization of storage in imperfect electricity markets. We apply a game-theoretic Cournot model to the German power market and analyze different counterfactual and realistic cases of pumped hydro storage. Our main finding is that both storage utilization and storage-related welfare effects depend on storage ownership and the operator's involvement in conventional generation. Strategic operators generally under-utilize owned storage capacity. Strategic storage operation may also lead to welfare losses, in particular if the total storage capacity is controlled by an oligopolistic generator that also owns conventional generation capacity. Yet in the current German situation, pumped hydro storage is not a relevant source of market power.

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes: Q48: Energy: Government Policy, C70: Game Theory and Bargaining Theory: General, Q41: Energy: Demand and Supply; Prices, Q53: Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling, Q54: Climate; Natural Disasters and Their Management; Global Warming, L11: Production, Pricing, and Market Structure; Size Distribution of Firms

Keywords: Electric Power Markets, Storage, Market Power, Nash-Cournot

DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No3-3


Published in Volume 32, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.