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Abstract for:

Efficiency Rents of Pumped-Storage Plants and their Uses for Operation and Investment Decisions

Anthony  Horsley,  Andrew J  Wrobel,  November 2000
Paper No' TE/2000/405: | Full paper (pdf)
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Keywords: Pumped storage; peak-load pricing; marginal values; linear programming

JEL Classification:

Is hard copy/paper copy available? YES - Paper Copy Still In Print.
This Paper is published under the following series: Theoretical Economics
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We apply duality methods of linear and convex programming to the problems of operation and rental valuation of facilities for conversion and storage of cyclically priced goods, e.g. , energy. Both problems are approached by shadow-pricing the stock (which is a purely intermediate commodity); and if the given market price p for the final good is a continuous function of time, then the stock's shadow price function ? is shown to be unique (and continuous). Therefore, despite being perfect Allen-Hicks complements, the plant's capacities have definite and separate marginal values, which are expressed in terms of ? (and p). In particular, the unit reservoir rent equals the total positive variation of ? over the cycle. The optimal storage policy is also given in terms of ? and p). The marginal capacity values are used to determine the optimum investment. The framework can accommodate related storage problems (such as hydroelectric generation).