Renewable, Flexible, and Storage Capacities: Friends or Foes?

56 Pages Posted: 15 Dec 2021 Last revised: 28 May 2024

See all articles by Xiaoshan Peng

Xiaoshan Peng

Indiana University - Kelley School of Business

Owen Q. Wu

Indiana University - Kelley School of Business

Gilvan Souza

University of Tennessee

Date Written: May 10, 2024

Abstract

Over 99% of the new power generation capacity to be installed in the U.S. from 2023 to 2050 will be powered by wind, solar, and natural gas. Additionally, large-scale battery systems are planned to support power systems. It is paramount for policymakers and electric utilities to deepen the understanding of the operational and investment relations among renewable, flexible (natural gas-powered), and storage capacities. In this paper, we optimize both the joint operations and investment mix of these three types of resources, examining whether they act as investment substitutes or complements. Using stochastic control theory, we identify and prove the structure of the optimal storage control policy, from which we determine various pairs of charging and discharging operations. We find that whether storage complements or substitutes other resources hinges on the operational pairs involved and whether executing these pairs is constrained by charging or discharging. Through extensive numerical analysis using data from a Florida utility, government agencies, and industry reports, we demonstrate how storage operations drive the investment relations among renewable, flexible, and storage capacities. Storage and renewables substitute each other in meeting peak demand; storage complements renewables by storing surplus renewable output; renewables complement storage by compressing peak periods, facilitating peak shaving and displacement of flexible capacity. These substitution and complementary effects often coexist and the dominant effect can alternate as costs change. A thorough understanding of these relations at both operational and investment levels empowers decision-makers to optimize energy infrastructure investments and operations, thereby unlocking their full potential.

Keywords: Renewable energy, flexible generation, energy storage, capacity investment, stochastic optimal control

JEL Classification: C61, D24, D25, L94, Q20, Q40, Q42, Q48

Suggested Citation

Peng, Xiaoshan and Wu, Owen Q. and Souza, Gilvan, Renewable, Flexible, and Storage Capacities: Friends or Foes? (May 10, 2024). Available at SSRN: https://ssrn.com/abstract=3983678 or http://dx.doi.org/10.2139/ssrn.3983678

Xiaoshan Peng

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Bloomington, IN 47405-1701
United States

Owen Q. Wu (Contact Author)

Indiana University - Kelley School of Business ( email )

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

Gilvan Souza

University of Tennessee ( email )

453 Haslam Business Building
Knoxville, TN 37996-4140
United States

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