Paper: arXiv 2410.12495

Authors: Roxana Dumitrescu, Redouane Silvente, Peter Tankov

Abstract

We study the price impact of storage facilities in electricity markets and analyze the long-term profitability of these facilities in prospective scenarios of energy transition. To this end, we begin by characterizing the optimal operating strategy for a stylized storage system, assuming an arbitrary exogenous price process. Following this, we determine the equilibrium price in a market comprising storage systems (acting as price takers), renewable energy producers, and conventional producers with a defined supply function, all driven by an exogenous demand process. The price process is characterized as a solution to a fully coupled system of forward-backward stochastic differential equations, for which we establish existence and uniqueness under appropriate assumptions. We finally illustrate the impact of storage on intraday electricity prices through numerical examples and show how the revenues of storage agents may evolve in prospective energy transition scenarios from RTE, the French energy electricity network operator, taking into account both the increasing penetration of renewable energies and the self-cannibalization effect of growing storage capacity. We find that both the average revenues and the interquantile ranges increase in all scenarios, highlighting higher expected profits and higher risk for storage assets.

Complexity vs Empirical Score

  • Math Complexity: 8.5/10
  • Empirical Rigor: 6.0/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper presents a rigorous theoretical framework using stochastic control and fully coupled FBSDEs with jump processes to establish equilibrium electricity prices under storage constraints. While the empirical side is driven by numerical illustrations and RTE scenario projections rather than extensive econometric backtesting on tick data, the theoretical novelty and relevance to the energy transition make it a high-quality contribution.

Research Flowchart

  flowchart TD
    A[Research Goal: Assess Storage Price Impact & Long-Term Profitability] --> B[Model Optimal Storage Strategy & Market Equilibrium]
    C[Inputs: RTE Energy Transition Scenarios, Demand, Wind & Solar Generation] --> D[Solve Coupled FBSDEs for Equilibrium Prices]
    B --> D
    D --> E[Numerical Simulation: Intraday Prices & Storage Revenue Evolution]
    E --> F[Key Findings: Higher Expected Profits but Increased Risk/Volatility for Storage]