DP15444 Storing Power: Market Structure Matters

Author(s): David Andrés-Cerezo, Natalia Fabra
Publication Date: November 2020
Date Revised: December 2020
Keyword(s): electricity, investment, market structure, Storage
JEL(s): L22, L94
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15444

We assess how firms' incentives to operate and invest in energy storage depend on the market structure. For this purpose, we characterize equilibrium market outcomes allowing for market power in storage and/or production, as well as for vertical integration between storage and production. Market power reduces overall efficiency through two channels: it induces an inefficient use of the storage facilities, and it distorts investment incentives. The worst outcome for consumers and total welfare occurs under vertical integration. We illustrate our theoretical results by simulating the Spanish wholesale electricity market for different levels of storage capacity. The results are key to understanding how to regulate energy storage, an issue which is critical for the deployment of renewables.