The Theory of Storage in a Power System with Stochastic Demand

TL;DR

This paper develops a theoretical framework to determine the optimal size, operation, and hedge contracts for energy storage in power systems with stochastic demand, focusing on i.i.d. demand fluctuations.

Contribution

It provides a novel theoretical analysis of storage requirements, operation, and hedging strategies in power systems with stochastic, i.i.d. demand uncertainty.

Findings

Characterizes optimal storage operation and investment conditions.

Uses price-duration curves for graphical interpretation.

Identifies optimal hedge contracts for storage units.

Abstract

Electric power systems are increasingly turning to energy storage systems to balance supply and demand. But how much storage is required? What is the optimal volume of storage in a power system and on what does it depend? In addition, what form of hedge contracts do storage facilities require? We answer these questions in the special case in which the uncertainty in the power system involves successive draws of an independent, identically-distributed random variable. We characterize the conditions for the optimal operation of, and investment in, storage and show how these conditions can be understood graphically using price-duration curves. We also characterize the optimal hedge contracts for storage units.