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Efficiency Rents of Pumped-Storage Plants and their Uses for Operation and Investment Decisions
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Abstract
We apply duality methods of linear and convex programming to the problems of operation and rental valuation of facilities for conversion and storage of cyclically priced goods, e.g. , energy. Both problems are approached by shadow-pricing the stock (which is a purely intermediate commodity); and if the given market price p for the final good is a continuous function of time, then the stock's shadow price function ? is shown to be unique (and continuous). Therefore, despite being perfect Allen-Hicks complements, the plant's capacities have definite and separate marginal values, which are expressed in terms of ? (and p). In particular, the unit reservoir rent equals the total positive variation of ? over the cycle. The optimal storage policy is also given in terms of ? and p). The marginal capacity values are used to determine the optimum investment. The framework can accommodate related storage problems (such as hydroelectric generation).Pumped storage, peak-load pricing, marginal values, linear programming