Peak-Load Pricing and Investment Cost Recovery with Duration-Limited Storage
This provides insights for energy market design and storage investment, though it is incremental as it extends an existing model.
The paper tackles how duration-limited storage affects optimal pricing and investment in energy systems, finding that storage recovers energy capacity costs per peak event rather than over total peak hours, with the scarcity premium primarily linked to fixed costs.
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.