Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

Abstract: I consider an economy with fossil fuel and renewable energy and energy storage, and search for the conditions that lead to welfare improvements when energy is stored. I then solve for the optimal decision rule and analyze the long-run tendencies of the economy-energy variables. The findings are threefold. First, energy storage is fostered by the convexity of the marginal utility (prudence), the marginal cost function for fossil fuel energy, and the degree of intermittency. Second, considering a low penetration of renewable energy to the power grid, energy storage is not welfare improving if the fossil fuel energy cost function is linear. Third, energy storage creates an added value to renewable energy investments when actively used. By showing the in uence that energy storage can have on energy generation and investment decisions, I hope that the current work can be in uential in a more generous treatment of energy supply in future energy-economy-climate models.

Keywords: Energy storage; Fossil fuel energy; Renewable energy; Precautionary savings; Collocation method; Monte Carlo simulations.

JEL-codes: C61; C63; G31; Q21; Q41; Q42

40 pages, June 30, 2014

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