Precautionary Energy Storage Summary Introduction Prudence - PowerPoint PPT Presentation

Precautionary Energy Storage Tun¸ c Durmaz Precautionary Energy Storage Summary Introduction Prudence Frugality Production risk Tun¸ c Durmaz Capacity NHH/CityU The model Competitive market equilibrium Conclusion The Economics of Energy and Climate Change Toulouse, September 8, 2015

Presentation Precautionary Energy Storage 1 Summary Tun¸ c Durmaz 2 Introduction Summary Introduction Prudence Prudence Frugality Frugality Production risk Production risk Capacity Capacity The model Competitive market 3 The model equilibrium Conclusion 4 Competitive market equilibrium 5 Conclusion

Summary Precautionary Energy Storage Tun¸ c Durmaz energy storage technologies primarily used to take advantage of dispatchable sources and demand variability Summary Introduction the underlying economic analysis mainly on pumped hydro Prudence storage Frugality Production risk Capacity increasing shares of renewable energy (RE) have drawn The model attention to storage technologies Competitive not much consideration on energy storage due to market equilibrium precautionary motives Conclusion to what extent a convex marginal utility, prudence , and a convex marginal cost, frugality , can spur energy storage.

Summary Precautionary Energy Storage a simple theoretical model Tun¸ c Durmaz characterize the optimal solution Summary demonstrate how prudence and frugality induce further Introduction energy saving Prudence Frugality show how the optimal allocation can be decentralized Production risk Capacity through competitive markets. The model implications of prudence and frugality in a decentralized Competitive setting market equilibrium upward pressure on spot market energy prices Conclusion higher uncertainty → greater impact of prudence and frugality ...

Introduction Precautionary Energy Storage Tun¸ c Durmaz a number of strategies exist to deal with the challenges Summary created by intermittent RE Introduction 1 thermal dispatchable generation Prudence Frugality 2 demand response Production risk Capacity 3 energy storage The model 4 ... Competitive market equilibrium the paper embraces the first three Conclusion main contribution: theoretical

Introduction Precautionary Energy Storage Tun¸ c Durmaz Summary prudence w.r.t electricity consumption, U ′′′ ≥ 0 Introduction Prudence “ convex marginal utility ” Frugality Production risk frugality, C ′′′ ≥ 0 “ convex marginal cost ” Capacity The model in the presence of uncertainty Competitive endows a cost-minimizing producer with the same market motivations as that of a prudent consumer equilibrium Conclusion

Prudence: What it means to be prudent in our framework? Precautionary Energy Storage Tun¸ c Durmaz Summary Introduction Prudence Frugality Production risk Capacity The model Competitive market equilibrium Conclusion

Prudence: What it means to be prudent in our framework? Precautionary Energy U ( q ) , q : electricity consumption Storage Tun¸ c Durmaz Summary Introduction Prudence Frugality Production risk Capacity The model Competitive market equilibrium Conclusion

Prudence: What it means to be prudent in our framework? Precautionary Energy U ( q ) , q : electricity consumption Storage U ′ > 0 Tun¸ c Durmaz Summary Introduction Prudence Frugality Production risk Capacity The model Competitive market equilibrium Conclusion

Prudence: What it means to be prudent in our framework? Precautionary Energy U ( q ) , q : electricity consumption Storage U ′ > 0 Tun¸ c Durmaz Suppose a consumer is exposed to a zero-mean consumption Summary risk, ˜ x . Introduction Prudence Frugality Production risk Capacity The model Competitive market equilibrium Conclusion

Prudence: What it means to be prudent in our framework? Precautionary Energy U ( q ) , q : electricity consumption Storage U ′ > 0 Tun¸ c Durmaz Suppose a consumer is exposed to a zero-mean consumption Summary risk, ˜ x . Introduction Prudence Frugality When the consumer is risk averse (i.e., U ′′ < 0), Production risk Capacity The model Competitive market equilibrium Conclusion

Prudence: What it means to be prudent in our framework? Precautionary Energy U ( q ) , q : electricity consumption Storage U ′ > 0 Tun¸ c Durmaz Suppose a consumer is exposed to a zero-mean consumption Summary risk, ˜ x . Introduction Prudence Frugality When the consumer is risk averse (i.e., U ′′ < 0), Production risk Capacity The model cost of uncertainty: Competitive market k ( q ) ≡ U ( q ) − E [ U ( q + ˜ x )] > 0 equilibrium Conclusion

Prudence: What it means to be prudent in our framework? Precautionary Energy U ( q ) , q : electricity consumption Storage U ′ > 0 Tun¸ c Durmaz Suppose a consumer is exposed to a zero-mean consumption Summary risk, ˜ x . Introduction Prudence Frugality When the consumer is risk averse (i.e., U ′′ < 0), Production risk Capacity The model cost of uncertainty: Competitive market k ( q ) ≡ U ( q ) − E [ U ( q + ˜ x )] > 0 equilibrium Conclusion a consumer is prudent w.r.t. q if k ′ ( q ) < 0: k ′ ( q ) < 0 if U ′′′ > 0

Prudence: What it means to be prudent in our framework? Precautionary Energy U ( q ) , q : electricity consumption Storage U ′ > 0 Tun¸ c Durmaz Suppose a consumer is exposed to a zero-mean consumption Summary risk, ˜ x . Introduction Prudence Frugality When the consumer is risk averse (i.e., U ′′ < 0), Production risk Capacity The model cost of uncertainty: Competitive market k ( q ) ≡ U ( q ) − E [ U ( q + ˜ x )] > 0 equilibrium Conclusion a consumer is prudent w.r.t. q if k ′ ( q ) < 0: k ′ ( q ) < 0 if U ′′′ > 0 ∗ consuming stored energy is one way to increase q

Frugality: What it means to be frugal in our framework? Precautionary Energy Storage Tun¸ c Durmaz Summary Introduction Prudence Frugality Production risk Capacity The model Competitive market equilibrium Conclusion

Frugality: What it means to be frugal in our framework? Precautionary Energy Storage C ( q ) , q : energy production Tun¸ c Durmaz Summary Introduction Prudence Frugality Production risk Capacity The model Competitive market equilibrium Conclusion

Frugality: What it means to be frugal in our framework? Precautionary Energy Storage C ( q ) , q : energy production C ′ > 0 and C ′′ > 0 Tun¸ c Durmaz Summary Introduction Prudence Frugality Production risk Capacity The model Competitive market equilibrium Conclusion

Frugality: What it means to be frugal in our framework? Precautionary Energy Storage C ( q ) , q : energy production C ′ > 0 and C ′′ > 0 Tun¸ c Durmaz Summary Suppose a firm is exposed to a zero-mean production risk, ˜ x . Introduction Prudence Frugality Production risk Capacity The model Competitive market equilibrium Conclusion

Frugality: What it means to be frugal in our framework? Precautionary Energy Storage C ( q ) , q : energy production C ′ > 0 and C ′′ > 0 Tun¸ c Durmaz Summary Suppose a firm is exposed to a zero-mean production risk, ˜ x . Introduction Prudence When the marginal cost is increasing (i.e., C ′′ > 0) Frugality Production risk Capacity The model Competitive market equilibrium Conclusion

Frugality: What it means to be frugal in our framework? Precautionary Energy Storage C ( q ) , q : energy production C ′ > 0 and C ′′ > 0 Tun¸ c Durmaz Summary Suppose a firm is exposed to a zero-mean production risk, ˜ x . Introduction Prudence When the marginal cost is increasing (i.e., C ′′ > 0) Frugality Production risk Capacity penalty of uncertainty: The model Competitive ρ ( q ) ≡ E [ C ( q + ˜ x )] − C ( q ) > 0 market equilibrium Conclusion

Frugality: What it means to be frugal in our framework? Precautionary Energy Storage C ( q ) , q : energy production C ′ > 0 and C ′′ > 0 Tun¸ c Durmaz Summary Suppose a firm is exposed to a zero-mean production risk, ˜ x . Introduction Prudence When the marginal cost is increasing (i.e., C ′′ > 0) Frugality Production risk Capacity penalty of uncertainty: The model Competitive ρ ( q ) ≡ E [ C ( q + ˜ x )] − C ( q ) > 0 market equilibrium a firm is frugal w.r.t. q if ρ ′ ( q ) > 0: Conclusion ρ ′ ( q ) > 0 if C ′′′ > 0

Frugality: What it means to be frugal in our framework? Precautionary Energy Storage C ( q ) , q : energy production C ′ > 0 and C ′′ > 0 Tun¸ c Durmaz Summary Suppose a firm is exposed to a zero-mean production risk, ˜ x . Introduction Prudence When the marginal cost is increasing (i.e., C ′′ > 0) Frugality Production risk Capacity penalty of uncertainty: The model Competitive ρ ( q ) ≡ E [ C ( q + ˜ x )] − C ( q ) > 0 market equilibrium a firm is frugal w.r.t. q if ρ ′ ( q ) > 0: Conclusion ρ ′ ( q ) > 0 if C ′′′ > 0 * using stored energy is one way to decrease q

How production risk emerges for a fossil fuel power generator? Precautionary Energy Storage Tun¸ c Durmaz particular focus on intermittent residual demand Summary Introduction Prudence Frugality Production risk Capacity The model Competitive market equilibrium Conclusion