Date of Original Version

1-2012

Type

Working Paper

Rights Management

All Rights Reserved

Abstract or Description

A typical strategy for dealing with commodity surpluses is to store them for future sale; in particular, this is true of electricity. However, because electricity prices can be negative, there exists another potential strategy: To buy and dispose of electricity surpluses at negative prices. It is not clear whether the storage strategy or the disposal strategy is more valuable for a merchant who trades electricity in a market. We investigate this question by modeling the problem of managing an electricity storage facility when prices can be negative: By varying the efficiency of the storage facility, our model encompasses both the case when electricity surpluses are stored and the case when they are destroyed.We establish the optimal policy structure of our model, and show that it subsumes the known optimal commodity storage policy structure when commodity prices are strictly positive. Then, using our optimal policy structure, we compare the storage and disposal strategies based on an existing electricity price model calibrated to historical electricity prices.We find that the disposal strategy is even more valuable for a merchant than the storage strategy.

Comments

Tepper Working Paper 2012-E1

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