Market valuation of a hypothetical pump-hydro storage plant in the Italian power system

Abstract

This study assesses the profitability of an investment in a pump hydro storage plant (PHS) located in Italy. We model in GAMS the operation of a price-taker PHS during nine years, from 2005 to 2013. Results show positive operation profits in all regions, with the highest results being recorded by the geographical zones SICI and SARD. The NPV analysis shows negative values though, ranging between -148 €/MWh and -75 €/MWh, for the storage investments in all regions. This result might be due to several factors. In general arbitrage profits are higher in correspondence to big price spreads. In Italy, although maximum prices are quite high with respect to other European countries, minimum price levels are also high, which leads to high operation costs and worst business case for storage investment. The study deserves further investigation of the strategic role of storage at system level to include wider benefits to the overall market assessment.