Energy Journal. 2010, Vol. 31 Issue 2, p173-198. 26p.
Market volatility, Arbitrage, Interest (Finance), Prices, Corporate profits, Energy consumption, and Electricity
Increases in electricity price volatility have raised interest in electricity storage and its potential arbitrage value. Large utility-scale electricity storage can decrease the value of energy arbitrage by smoothing differences in prices on- and off-peak, however this price-smoothing effect can result in significant external welfare gains by reducing consumer energy costs and generator profits. As such, the incentives of merchant storage operators, consumers, and generators may not be properly aligned to ensure socially-optimal storage use. We examine storage use incentives for these different agent types and show that under most reasonable market structures a combination of merchant and consumer ownership of storage maximizes potential welfare gains from storage use. [ABSTRACT FROM AUTHOR]