A CAES plant's ability to store energy makes it ideally
suited for price arbitrage and hedging activities in the electricity trading
markets. A CAES plant can arbitrage a variety of different types of pricing
spreads, based on time of day, market, fuel, or location.
Off-peak prices are consistently lower than prices during peak periods,
so CAES plants are able to "buy low and sell high." Though recent
U.S. on-peak pricing has not matched the highs of the late 1990's (see
the following charts), there can be wide spreads between on and off-peak
prices. During extreme on-peak price spikes, when prices soared to several
hundred dollars per MWh, off-peak prices remained relatively consistent,
resulting in even wider on-peak/off-peak spreads than normal.
Price volatility will continue to be a fundamental
characteristic of the evolving electricity markets. By being able to store
electricity when prices are low and deliver it when prices are high, a
CAES plant can serve as a tool for electricity traders, as well as a price
risk hedge for producers and consumers of power.
|Click on the charts
to view the larger versions.
Though we frequently talk about the "electricity market," there
are in fact many different markets for many different products. A CAES
plant can store electricity from one market and sell into another, effectively
arbitraging the respective markets. While the most obvious application
might be a plant interconnected into two market regions, numerous intra-regional
opportunities also exist.
The economics and operating characteristics of generation plants vary
according to their fuel source, and CAES provides an opportunity to arbitrage
between fuel sources. For example, a plant can store power produced when
low cost fuels are on the margin, and then produce electricity when relatively
high heat rate gas fired generation is on the margin.
Location arbitrage can provide another trading opportunity for CAES plants.
A plant can transmit power across a potential capacity constraint during
off-peak periods for regeneration later under constrained conditions.
Since power on the "right" side of the constraint would sell
for a premium, the CAES plant can arbitrage the differential between power
prices around the constraint.
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