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The Economics of Grid-Scale Electricity Storage: Location Heterogeneity and Business Models

This paper develops an economic theory of optimal grid-scale electricity storage for three distinct applications, referred to as 'supply-side storage,' 'nodal storage', and 'demand-side storage.' Traditionally, grid-scale electricity storage was the exclusive domain of pumped hydro. The emergence of new storage technologies such as flow batteries and compressed air storage, combined with an increasing amount of electricity generation from intermittent renewable energy sources, leads to new questions about economic trade-offs, integration, and location choice. This paper combines theoretical economic modelling with empirical simulations based on power and nodal price data from Ontario's ten electricity zones. It highlights the importance of location heterogeneity and sheds light on performance characteristics of storage systems that optimally exploit arbitrage and integration opportunities. It further explores the economic limits of storage technologies as price stabilization reduces benefits from price arbitrage. The key results are as follows. First, nodal storage based on price arbitrage is currently only profitable in select locations characterized by high nodal price variability. Second, supply-side storage will emerge only if intermittent power suppliers are fully exposed to curtailment risk generated by their supply. Third, demand-side storage can be economical if transmission expansion for remote communities is very expensive. Fourth, empirical evidence suggests that grid-scale batteries can be cycled about twice per day, much more than often assumed.