When the Wind of Change Blows, Build Batteries? Optimum Renewable Generation and Energy Storage Investments.

62 Pages Posted: 18 Feb 2021

See all articles by Christian Kaps

Christian Kaps

University of Pennsylvania - The Wharton School

Simone Marinesi

The Wharton School, University of Pennsylvania

Serguei Netessine

The Wharton School, University of Pennsylvania

Date Written: January 6, 2021

Abstract

Renewables have become the cheapest energy source in most of the world, but their generation remains variable and difficult to predict. Recent technological advances have rendered large-scale electricity storage economically viable, thus mitigating the renewable intermittency issue and enabling combinations of renewable generation plus storage, e.g., wind farms and batteries, to be potentially viable candidates to replace fossil fuel power plants. However, it is not yet well-understood how to jointly determine optimal capacity for their generation and storage. Our work aims to shed light on this question by developing a two-product newsvendor model of a utility's strategic capacity investment in renewable generation and storage to match demand with supply, while using fossil-fuel backup, if needed. We establish optimal capacity guidelines contingent on market and technology parameters. We find that renewable generation and storage are strategic complements, except in cases with very high penetration of either technology, when they surprisingly turn into strategic substitutes. We also develop sufficient and necessary conditions, as well as a simple heuristic, to determine which of the many storage technologies can turn a profit in the broadest set of market conditions, and thus is likely to be adopted first (for multi-hour storage). In particular, we show that low-efficiency, cheap technologies, such as thermal, can turn a profit easier than high-efficiency, expensive ones, such as lithium-ion batteries. Using real-life data from Europe and the US, we calibrate our model to provide insight on the role that large-scale storage plays in both the short- and long-term, while technology improves, emission taxes are levied, and renewables become cheaper. Finally, we show that, when generation and storage investment decisions are made by different players, investment levels decrease relative to the monopoly outcome.

Keywords: sustainable operations, energy storage, renewable generation, capacity investment

Suggested Citation

Kaps, Christian and Marinesi, Simone and Netessine, Serguei, When the Wind of Change Blows, Build Batteries? Optimum Renewable Generation and Energy Storage Investments. (January 6, 2021). Available at SSRN: https://ssrn.com/abstract=3761397

Christian Kaps (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Simone Marinesi

The Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Serguei Netessine

The Wharton School, University of Pennsylvania ( email )

3730 Walnut Street
Philadelphia, PA 19104-6367
United States
(215) 573 3571 (Phone)

HOME PAGE: http://www.netessine.com

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