Working Paper: CEPR ID: DP15444
Authors: Natalia Fabra; David Andrés-Cerezo
Abstract: We assess how firms' incentives to operate and invest in energy storage depend on the market structure. For this purpose, we characterize equilibrium market outcomes allowing for market power in storage and/or production, as well as for vertical integration between storage and production. Market power reduces overall efficiency through two channels: it induces an inefficient use of the storage facilities, and it distorts investment incentives. The worst outcome for consumers and total welfare occurs under vertical integration. We illustrate our theoretical results by simulating the Spanish wholesale electricity market for different levels of storage capacity. The results are key to understanding how to regulate energy storage, an issue which is critical for the deployment of renewables.
Keywords: storage; electricity; market structure; investment
JEL Codes: L22; L94
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market power in storage and/or generation (L94) | Overall efficiency (D61) |
| Market power (L11) | Inefficient use of storage facilities (L99) |
| Market power (L11) | Distorted investment incentives (H32) |
| Vertical integration (L22) | Worse outcomes for consumer welfare and total welfare (D69) |
| Competitive market conditions (L13) | Alignment of social and private incentives in storage decisions (D14) |
| Monopolistic control of storage (L12) | Underinvestment in storage (D25) |
| Installed storage capacity (E22) | Arbitrage profits for competitive storage firms (D43) |
| Market power (L11) | Total welfare and consumer surplus (D69) |
| Market power in production (L11) | Static productive inefficiencies (D24) |
| Market power in storage (L97) | Dynamic inefficiencies (D61) |