Electricity Trading and Negative Prices: Storage vs. Disposal

Y. Zhou, A. Scheller-Wolf, N. Secomandi, S. Smith, Electricity Trading and Negative Prices: Storage vs. Disposal, Management Science, 62(3), 880-898, 2016.

Posted: 30 Dec 2014 Last revised: 10 Mar 2017

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: December 16, 2014

Abstract

Electricity cannot yet be stored on a large scale, but technological advances leading to cheaper and more efficient industrial batteries make grid-level storage of electricity surpluses a natural choice. Because electricity prices can be negative, it is unclear how the presence of negative prices might affect the storage policy structure known to be optimal when prices are only non-negative, or even how important it is to consider negative prices when managing an industrial battery. For fast storage (a storage facility that can both be fully emptied and filled up in one decision period), we show analytically that negative prices can substantially alter the optimal storage policy structure, e.g., all else being equal, it can be optimal to empty an almost empty storage facility and fill up an almost full one. For more typical slow grid-level electricity storage, we numerically establish that ignoring negative prices could result in a considerable loss of value when negative prices occur more than 5% of the time. Negative prices raise another possibility: rather than storing surpluses, a merchant might buy negatively priced electricity surpluses and dispose of them, e.g., using load banks. We find that the value of such disposal strategy is substantial, e.g., about 118 $/kW-year when negative prices occur 10% of the time, but smaller than that of the storage strategy, e.g., about 391 $/kW-year using a typical battery. However, devices for disposal are much cheaper than those for storage. Our results thus have ramifications for merchants as well as policy makers.

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

Suggested Citation

Zhou, Yangfang and Scheller-Wolf, Alan Andrew and Secomandi, Nicola and Smith, Stephen, Electricity Trading and Negative Prices: Storage vs. Disposal (December 16, 2014). Y. Zhou, A. Scheller-Wolf, N. Secomandi, S. Smith, Electricity Trading and Negative Prices: Storage vs. Disposal, Management Science, 62(3), 880-898, 2016.. Available at SSRN: https://ssrn.com/abstract=2543790 or http://dx.doi.org/10.2139/ssrn.2543790

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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