Peak-Load Pricing and Investment Cost Recovery with Duration-Limited Storage

TL;DR

This paper extends peak-load pricing models to include duration-limited storage, revealing how storage constraints influence pricing and capacity investment decisions in solar-dominated energy systems.

Contribution

It introduces a model incorporating duration-limited storage constraints into peak-load pricing, linking prices to storage costs and efficiency, and analyzing their impact on investment and pricing.

Findings

Scarcity premium mainly reflects storage fixed costs.

Duration constraints cause capacity costs to be recovered per peak event.

Storage recovers capacity costs differently than conventional generators.

Abstract

Energy storage shifts energy from off-peak periods to on-peak periods. Unlike conventional generation, storage is duration-limited: the stored energy capacity constrains the duration over which it can supply power. To understand how these constraints affect optimal pricing and investment decisions, we extend the classic two-period peak-load pricing model to include duration-limited storage. By adopting assumptions typical of solar-dominated systems, we link on- and off-peak prices to storage investment costs, round-trip efficiency, and the duration of the peak period. The bulk of the scarcity premium from on-peak prices is associated with the fixed costs of storage as opposed to variable costs stemming from round-trip efficiency losses. Unlike conventional generators, the binding duration constraints lead storage to recover energy capacity costs on a per-peak-event basis instead of amortizing these costs over total peak hours. A numerical example illustrates the implications for equilibrium prices and capacity investment.