Abstract
We develop a model of electricity markets with intermittent renewable generators, thermal plants and battery owners. Our model incorporates the case of distributed generation, or prosumers, which are agents that both consume and produce power with photovoltaic systems (PV), which have low marginal cost, but rely on stochastic and non-marketable inputs. Batteries have an important role in this world, since they increase the supply reliability of a system with a large share of intermittent generators. Batteries smooth prices across periods, but have decreasing marginal benefit due to this effect on prices. Consequently, the predicted adoption rate of batteries is limited, even as battery prices decrease. We then calibrate our model with data from Uruguay, and show that the marginal profits from batteries go to zero after battery capacity crosses a threshold, and its adoption rate never reaches 100% of the renewables’ capacity.
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