The value of flexible selling: Power production with storage for spinning reserve provision

A stored commodity is sold under a capacity constraint depending on an exogenous random market price, and, alternatively, a service contract can be provided in which the selling amount must be held constant over time independent of price changes. The seller of the commodity is assumed to optimize the trade-off between the received payment for the provision of the service and the loss of flexibility by the reduced selling on the market. The chosen setup allows for closed-form solutions, such that the analysis is of theoretical interest. A potential application is hydropower storage optimization against exogenous electricity prices with the option to enter contracts for providing spinning reserve; spinning reserve is needed to stabilize large-scale power systems. A single-period model is considered, and the storage level of the commodity is bounded from below in expectation. These simplifications allow a closed-form solution of bang-bang type, even under our assumption of an infinite probability space. (C) 2019 Elsevier B.V. All rights reserved.