Is it More Valuable to Store or Destroy Electricity Surpluses?

23 Pages Posted: 8 Aug 2012 Last revised: 31 Dec 2014

See all articles by Yangfang Zhou

Yangfang Zhou

Singapore Management University - Lee Kong Chian School of Business

Alan Andrew Scheller-Wolf

Carnegie Mellon University

Nicola Secomandi

Carnegie Mellon University - David A. Tepper School of Business

Stephen Smith

Carnegie Mellon University - School of Computer Science

Date Written: January 7, 2012

Abstract

A typical strategy for dealing with commodity surpluses is to store them for future sale; in particular, this is true of electricity. However, because electricity prices can be negative, there exists another potential strategy: To buy and dispose of electricity surpluses at negative prices. It is not clear whether the storage strategy or the disposal strategy is more valuable for a merchant who trades electricity in a market. We investigate this question by modeling the problem of managing an electricity storage facility when prices can be negative: By varying the efficiency of the storage facility, our model encompasses both the case when electricity surpluses are stored and the case when they are destroyed. We establish the optimal policy structure of our model, and show that it subsumes the known optimal commodity storage policy structure when commodity prices are strictly positive. Then, using our optimal policy structure, we compare the storage and disposal strategies based on an existing electricity price model calibrated to historical electricity prices. We find that the disposal strategy is even more valuable for a merchant than the storage strategy.

Keywords: inventory, electricity storage, Markov decision process, asset pricing models, negative prices

Suggested Citation

Zhou, Yangfang and Scheller-Wolf, Alan Andrew and Secomandi, Nicola and Smith, Stephen, Is it More Valuable to Store or Destroy Electricity Surpluses? (January 7, 2012). Available at SSRN: https://ssrn.com/abstract=2126302 or http://dx.doi.org/10.2139/ssrn.2126302

Yangfang Zhou (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore 178899
Singapore

Alan Andrew Scheller-Wolf

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

Nicola Secomandi

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Stephen Smith

Carnegie Mellon University - School of Computer Science ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213
United States

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