Market Structure In Electricity Storage - How Does The Market Structure Impact Incentives For Investment Into Energy Storage Given Cost Shocks And Arbitrage?

Abstract: Energy storage is the pivotal ingredient for a successful transition in the energy sector. However, when it comes to investment in energy storage, questions arise about the regulation of the storage market and public policy in support of its development. This thesis contributes to the discussion by analyzing the incentives that occur under different market structures given unexpected cost shocks in production by employing a three-stage analytical model of an energy market. The results highlight the importance of considering the evolving market structure when designing policy and show how the absence of arbitrage in electricity markets may affect storage investment. Furthermore, market power in electricity production interacts with the structure in the storage market, affects the pass-through of cost shocks, and changes arbitrage behavior. Unanticipated demand-correlated shocks to production only influence the incentives for storage investment when the storage provider considers reactions by electricity producers with market power. Overall, market power in electricity storage incentivizes underinvestment, which is socially undesirable.