The document discusses the role of energy storage in the energy transition, highlighting its benefits such as facilitating renewable integration and reducing generation costs. It examines market structures' influence on storage decisions, revealing that under-investment and market power issues can arise without proper regulation. Ultimately, it concludes that while storage offers potential benefits, market structures often fail to create adequate investment incentives.

1. Energy Storage:
Opportunities and Challenges
SITE Energy Talk. April 2021
Natalia Fabra
EnergyEcoLab, Universidad Carlos III de Madrid
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2. We will soon be here....
Electricity Demand and Solar PV Generation
(Spanish 2019 data with planned investments up to 2030)
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3. We will soon be here....
Electricity Demand and Solar PV Generation
(Spanish 2019 data with planned investments up to 2030)
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4. Key benefits of energy storage
Energy storage’s key role in the energy transition:
1 It facilitates the integration of renewables in the power sector.
By reducing spills at times of excess production.
2 It improves security of supply:
By reducing the need to invest in back-up capacity.
3 It reduces generation costs:
By replacing expensive energy with cheap energy.
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5. Key benefits of energy storage
Energy storage’s key role in the energy transition:
1 It facilitates the integration of renewables in the power sector.
By reducing spills at times of excess production.
2 It improves security of supply:
By reducing the need to invest in back-up capacity.
3 It reduces generation costs:
By replacing expensive energy with cheap energy.
Do markets internalize these (private and social) benefits?
Other instruments to induce efficient storage decisions?
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6. Do markets internalize these benefits?
1 Renewables’ integration: only by renewables’ owners
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7. Do markets internalize these benefits?
1 Renewables’ integration: only by renewables’ owners
2 Security of supply: no, it is an externality
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8. Do markets internalize these benefits?
1 Renewables’ integration: only by renewables’ owners
2 Security of supply: no, it is an externality
3 Cost reductions: only if...
No market power in generation
No market power in storage
No vertical integration generation-storage
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9. Do markets internalize these benefits?
1 Renewables’ integration: only by renewables’ owners
2 Security of supply: no, it is an externality
3 Cost reductions: only if...
No market power in generation
No market power in storage
No vertical integration generation-storage
The above implies...
1 and 2 Under-investment in storage
3 Market power in storage strengthens under-investment
→ [Some sort of] regulation is needed
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10. Storing Power: Market Structure Matters
Andrés-Cerezo, D. and N. Fabra (2020):
Storing Power: Market Structure Matters
We leave aside other market failures to focus on market power:
1 How does market power affect storage decisions?
Investment
Operation
2 How does this depend on the market structure?
Competitive vs. strategic storage
Competitive vs. strategic generation
Stand-alone vs. vertically integrated storage
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11. Storing technologies and market structure
Different types of storage give rise to different market structures
Figure: Pumped
hydro
Figure: Grid-scale
batteries
Figure: Electric
vehicle fleet
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12. Regulatory debate regarding market structure
Ownership structure:
California → Utilities mandated to invest in storage capacity.
Texas → Utilities not permitted to own storage capacity.
EU, FERC vs. Australia, Chile → Different views regarding
ownership by System Operators.
Investment decisions:
Recent orders by FERC and the European Commission assume
that markets provide optimal incentives for investment.
Some countries are already running auctions for storage
investments.
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13. Roadmap of our analysis
1 Theory: Stylized wholesale electricity market with storage
Main model ingredients:
Demand moves deterministically across time
Marginal costs of generation are increasing
Investment in storage followed by competition in generation
Dominant-fringe firm structure in generation
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14. Roadmap of our analysis
1 Theory: Stylized wholesale electricity market with storage
Main model ingredients:
Demand moves deterministically across time
Marginal costs of generation are increasing
Investment in storage followed by competition in generation
Dominant-fringe firm structure in generation
Cases considered for storage:
First-best (regulator decides on storage+generation)
Second-best (regulator decides on storage)
Competitive storage
Storage monopolist
Vertically integrated storage-generation firm
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15. Roadmap of our analysis
1 Theory: Stylized wholesale electricity market with storage
Main model ingredients:
Demand moves deterministically across time
Marginal costs of generation are increasing
Investment in storage followed by competition in generation
Dominant-fringe firm structure in generation
Cases considered for storage:
First-best (regulator decides on storage+generation)
Second-best (regulator decides on storage)
Competitive storage
Storage monopolist
Vertically integrated storage-generation firm
2 Simulations: Spanish electricity market
2030 market structure with different investments in storage
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16. Insights from the Theoretical Model

17. Storage under the First Best
Store/release to flatten demand/production
Invest in storage to equate the marginal cost savings due to
an extra unit of storage with its investment cost
Demand is not fully flatten
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18. Price arbitrage in competitive markets
Competitive storage firms make arbitrage profits by storing
when prices are low are releasing when prices are high
Prices allow firms to internalize the marginal costs savings
associated with storage
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19. Market power in generation
Market power in generation steepens price differences (higher
markups at peak times)
This creates artificially large arbitrage profits
And it can result in over-investment in storage
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20. Market power in storage
Large storage firms are no longer price-takers
They smooth storage so as to avoid strong price impacts
This distorts the use of storage, leading to
under-investment
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21. Vertical integration generation-storage
A vertically integrated (VI) firm operates storage taking into
account the price effects on storage and generation profits
1 The VI firm smooths the use of storage even more to
avoid strong price effects on its storage and generation
2 Storage is less valuable for a VI firm as it depresses its
generation profits
Vertical integration generation-storage distorts the optimal use
of storage and weakens the incentives to invest in storage
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22. Cost and price comparison
Market power creates productive inefficiencies:
Generation ⇒ Distorted market shares.
Storage ⇒ Less storage use, production not flattened.
Worsened by vertical integration.
Worsened when investment in storage is decided by firms.
Efficiency: cost ranking across market structures is
CFB
< CSB
< CC
< CM
< CI
< CNS
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23. Cost and price comparison
Market power creates productive inefficiencies:
Generation ⇒ Distorted market shares.
Storage ⇒ Less storage use, production not flattened.
Worsened by vertical integration.
Worsened when investment in storage is decided by firms.
Efficiency: cost ranking across market structures is
CFB
< CSB
< CC
< CM
< CI
< CNS
Consumers’ surplus: price ranking is
PFB
< PSB
< PC
< PM
< PI
< PNS
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24. Simulations

25. Simulations
Spanish electricity market with...
Current energy mix (medium renewables’ penetration)
2030 energy mix (high renewables’ penetration)
Detailed data: electricity demand and generation costs.
Different investment levels in storage capacity.
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26. Simulations
Spanish electricity market with...
Current energy mix (medium renewables’ penetration)
2030 energy mix (high renewables’ penetration)
Detailed data: electricity demand and generation costs.
Different investment levels in storage capacity.
Main results:
1 Results in line with theoretical analysis.
2 Complementarity between renewables and storage.
3 Storage unprofitable at current investment costs.
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27. Marginal value of storage investments
Marginal value of investing in storage for different levels of storage
investment (FB, SB and competitive firms)
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28. Efficiency and consumers’ gains
Generation costs and consumers’ expenditure
as a function of storage capacity
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29. Conclusions
Storage brings several potential benefits to electricity markets,
but they depend on the market structure.
The market does not provide adequate investment incentives
in storage capacity.
Market power in generation leads to over-investment.
Market power in storage to under-investment.
Vertical integration between storage and generation yields the
most inefficient outcome.
Storage capacity auctions:
Solve investment problem, but potential for inefficient storage
operation remains.
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30. Thank You!
Comments? Feedback? Questions?
natalia.fabra@uc3m.es
energyecolab.uc3m.es