Abstract
As decarbonisation progresses and conventional thermal generation gradually gives way to other technologies including intermittent renewables, there is an increasing requirement for system balancing from new and also fast-acting sources such as battery storage. In the deregulated context, this raises questions of market design and operational optimisation. In this paper, we assess the real option value of an arrangement under which an autonomous energy-limited storage unit sells incremental balancing reserve. The arrangement is akin to a perpetual American swing put option with random refraction times, where a single incremental balancing reserve action is sold at each exercise. The power used is bought in an energy imbalance market (EIM), whose price we take as a general regular one-dimensional diffusion. The storage operator’s strategy and its real option value are derived in this framework by solving the twin timing problems of when to buy power and when to sell reserve. Our results are illustrated with an operational and economic analysis using data from the German Amprion EIM.
Highlights
In today’s electric grids, power system security is managed in real time by the system operator, who coordinates electricity supply and demand in a manner that avoids fluctuations in frequency or disruption of supply
The arrangement is akin to a perpetual American swing put option with random refraction times, where a single incremental balancing reserve action is sold at each exercise
We investigate the procurement of operating reserve from energy-limited storage using a sequence of physically covered incremental reserve contracts
Summary
In today’s electric grids, power system security is managed in real time by the system operator, who coordinates electricity supply and demand in a manner that avoids fluctuations in frequency or disruption of supply (see, for example, New Zealand Electricity Authority 2016). The system operator carries out planning work to ensure that supply can meet demand, including the procurement of non-energy or ancillary services such as operating reserve, the capacity to make near real-time adjustments to supply and demand. These services are provided principally by network solutions such as the control of large-scale generation, from a technical perspective they can be provided by smaller, distributed resources such as demand response or energy storage Such resources have strongly differing operating characteristics: when compared to thermal generation, for example, energy storage is energy limited but can respond much more quickly. The UK System Operator National Grid has recently declared its intention to “create a marketplace for balancing that encourages new and existing
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