Arbitrage Opportunities for Pumped Storage Power Plants in Switzerland

Abstract

Over the past decade Switzerland has invested significantly in pumped storage plants (PSP). They aim to exploit arbitrage opportunities by pumping water from a lower reservoir to an upper reservoir to store electricity in the form of hydraulic potential energy when prices are low and generating when prices are high. The changing generation-mix in Switzerland threatens these arbitrage opportunities in the long-term. To study this, we develop a heuristic to endogenise PSP bidding decisions, and integrate it in [1]’s simulation model of the Swiss electricity market. Our results show that initially the increase of photovoltaic capacity encourages pumping, but the nuclear phase-out and the expiration of long-term import contracts significantly decrease the available energy, leading to a decline in pumping. Although those changes in the capacity-mix increase the difference between peak and off-peak prices significantly, PSP are unable to exploit these because of the low availability of cheap energy to pump. This situation severely limits arbitrage opportunities in the long-term. We conclude that large scale arbitrage requires the availability of cheap excess energy. This can be achieved either by demand management or by supporting base load technologies.