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The economic principles behind energy storage organisation

August 2015

Energy Focus

Electric energy storage is defined by its capability to withdraw energy from the electric grid at a certain time (e.g., when electricity price is low), hold it for a certain period, and finally inject it back into the grid at another given time (e.g., when electricity price is high). It provides valuable services to the entire electric system, moving on energy when it has a higher value, helping balancing generation and load or supplying capacity at peak time. It is considered as a potential cost-effective alternative for helping the power system decarbonisation with the massive integration of renewable energy sources.

In opposition to gas storage, the technical and economic characteristics of electric energy storage (in terms of economies of scale, access to technology, development and operation procedures) have favoured a treatment as a competitive activity as for generation assets. Regulatory intervention has been put aside or only used as a localized tool, and storage has been identified out of the monopolies of transmission and distribution networks following the tenets of activity unbundling.

Nevertheless, energy storage can still be associated with the operation of network systems. Indeed, its services are valued to support and optimize transmission and distribution systems (providing regulation services or helping relieve network congestions). In some specific cases, regulatory intervention could also help to frame storage development or operation when the market fails to reach the optima. Following this, a new approach allowing network operators to develop and operate storage assets within their regulated monopoly has been considered by some regulators and stakeholders (e.g., Italy, Belgium, etc.). This challenges the traditional consensus defining energy storage as a competitive activity unbundled from network monopolies.

The economic relevance of such an approach integrating storage activities into the regulated network monopolies is however dependent on the economic advantage it would bring to the energy system as a whole from the point of view of social welfare. The competitive approach should indeed be favoured in all cases where the market is able to deliver optimal storage capacity and brings its associated services to the system.

It is then necessary to examine how this alternative organization might be in some cases a better option from an economic point of view. Economic criteria need to be considered to assess the effects of regulated and/or network-integrated storage activities for the general interest.

This article brings light on those needs, with the aim of assessing which specific economic conditions could justify this new approach of development and operation of energy storage services by network operators as part of their regulated monopolies. It presents the main results of a qualitative and empirical study on this issue.

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