The Role of Storage in a Competitive Electricity Market and the Effects of Climate Change

30 Pages Posted: 4 Dec 2011 Last revised: 21 May 2012

See all articles by Lewis T. Evans

Lewis T. Evans

Victoria University of Wellington - New Zealand Institute for Study of Competition and Regulation Inc. (ISCR)

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Andrea Lu

The University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Date Written: May 21, 2012

Abstract

This paper uses a new model of a competitive electricity market to investigate the role of storage in markets dominated by hydro generation. Competition amongst generators leads to an endogenous shadow price of stored water, which facilitates the efficient intra-day and inter-season substitution of fuel. Overall welfare depends on storage capacity, the cost structure of non-hydro generators, and the characteristics of water inflows. If climate change reduces the long-run average level of inflows or leads to the introduction of a carbon tax then overall welfare will fall and the profitability of generators will rise. The welfare benefits from additional storage capacity will increase if climate change makes long-term inflows less predictable or leads to the introduction of a carbon tax. They will decrease if average inflows fall or the predictable seasonal cycle in inflows becomes less pronounced.

Keywords: electricity markets, stochastic river flows, storage options, climatic change

JEL Classification: Q2, Q4, D4, D9, L1

Suggested Citation

Evans, Lewis T. and Guthrie, Graeme and Lu, Andrea Y., The Role of Storage in a Competitive Electricity Market and the Effects of Climate Change (May 21, 2012). Available at SSRN: https://ssrn.com/abstract=1968028 or http://dx.doi.org/10.2139/ssrn.1968028

Lewis T. Evans (Contact Author)

Victoria University of Wellington - New Zealand Institute for Study of Competition and Regulation Inc. (ISCR) ( email )

Wellington 6001
New Zealand
64 4 4635562 (Phone)
64 4 4635566 (Fax)

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

Andrea Y. Lu

The University of Melbourne - Department of Finance ( email )

Level 12, 198 Berkeley Street
Parkville, Victoria 3010 3010
Australia
+61383443326 (Phone)
+61383446914 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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