The Reliability Value of Storage in a Volatile Environment

Abstract: This paper examines the value of storage in securing reliability of a system with uncertain supply and demand, and supply friction. The storage is frictionless as a supply source, but once used, it cannot be filled up instantaneously. The focus application is a power supply network in which the base supply and demand are assumed to match perfectly, while deviations from the base are modeled as random shocks with stochastic arrivals. Due to friction, the random surge shocks cannot be tracked by the main supply sources. Storage, when available, can be used to compensate, fully or partially, for the surge in demand or loss of supply. The problem of optimal utilization of storage with the objective of maximizing system reliability is formulated as minimization of the expected discounted cost of blackouts over an infinite horizon. It is shown that when the stage cost is linear in the size of the blackout, the optimal policy is myopic in the sense that all shocks are compensated by storage up to the available level of storage. However, when the stage cost is strictly convex, it may be optimal to curtail some of the demand and allow a small current blackout in the interest of maintaining a higher level of reserve to avoid a large blackout in the future. The value of storage capacity in improving system's reliability, as well as the effects of the associated optimal policies under different stage costs on the probability distribution of blackouts are examined.