Financial Storage Rights in Electric Power Networks

Abstract

The decreasing cost of energy storage technologies coupled with their potential to bring significant benefits to electric power networks have kindled research efforts to design both market and regulatory frameworks to facilitate the efficient construction and operation of such technologies. In this paper, we examine an open access approach to the integration of storage, which enables the complete decoupling of a storage facility's ownership structure from its operation. In particular, we analyze a nodal spot pricing system built on a model of economic dispatch in which storage is centrally dispatched by the independent system operator (ISO) to maximize social welfare. Concomitant with such an approach is the ISO's collection of a merchandising surplus reflecting congestion in storage. We introduce a class of tradable electricity derivatives ---referred to as financial storage rights (FSRs)--- to enable the redistribution of such rents in the form of financial property rights to storage capacity; and establish a generalized simultaneous feasibility test to ensure the ISO's revenue adequacy when allocating such financial property rights to market participants. Several advantages of such an approach to open access storage are discussed. In particular, we illustrate with a stylized example the role of FSRs in synthesizing fully hedged, fixed-price bilateral contracts for energy, when the seller and buyer exhibit differing intertemporal supply and demand characteristics, respectively.Comment: 24 page