Seasonal Energy Storage Operations with Limited Flexibility

42 Pages Posted: 18 Aug 2011

See all articles by Owen Q. Wu

Owen Q. Wu

Indiana University - Kelley School of Business

Derek D. Wang

University of Michigan, Stephen M. Ross School of Business

Zhenwei Qin

DTE Energy

Date Written: August 1, 2011

Abstract

The value of seasonal energy storage depends on how the firm best operates the storage to capture the seasonal price spread. Energy storage operations typically face limited operational flexibility characterized by the speed of storing and releasing energy. A widely used practice-based heuristic, the rolling intrinsic (RI) policy, generally performs well, but can significantly under-perform in some cases. In this paper, we aim to understand the gap between the RI policy and the optimal policy, and design improved heuristic policies to close or reduce this gap. A new heuristic policy, the “price-adjusted rolling intrinsic (PARI) policy,” is developed based on theoretical analysis of the value of storage options. This heuristic adjusts prices before applying the RI policy, and the adjusted prices inform the RI policy about the values of various storage options. Our numerical experiments show that the PARI policy is especially capable of recovering high value losses of the RI policy. For the instances where the RI policy loses more than 4% of the optimal storage value, the PARI policy on average is able to recover more than 90% of the value loss.

Keywords: Energy storage, storage valuation, real options, natural gas, heurisitic policy

Suggested Citation

Wu, Owen Q. and Wang, Derek D. and Qin, Zhenwei, Seasonal Energy Storage Operations with Limited Flexibility (August 1, 2011). Ross School of Business Paper No. 1160, Available at SSRN: https://ssrn.com/abstract=1911376 or http://dx.doi.org/10.2139/ssrn.1911376

Owen Q. Wu (Contact Author)

Indiana University - Kelley School of Business ( email )

Business 670
1309 E. Tenth Street
Bloomington, IN 47401
United States

Derek D. Wang

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Zhenwei Qin

DTE Energy ( email )

One Energy Plaza
Ann Arbor, MI 48108
United States

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