Quantifying the Impact of Missing Risk Markets for Decarbonized Power Systems with Long Duration Energy Storage

TL;DR

This paper develops a two-stage stochastic equilibrium model with risk-averse agents to quantify how missing risk markets affect investment in decarbonized power systems that rely on long-duration energy storage (LDES). By contrasting complete versus fully incomplete markets and solving with ADMM, it shows that incomplete markets reduce social welfare, raise prices, and impair reliability, with a pronounced under-investment in LDES and higher financing costs for LDES relative to shorter-duration storage. The GB case demonstrates that hedging revenue risk lowers the cost of capital and accelerates investment in reliability-enhancing, zero-carbon technologies, highlighting the policy value of revenue-de-risking mechanisms. The findings underscore the need for instruments that hedge long-horizon revenues to enable scalable deployment of LDES in future energy systems.

Abstract

The transition to a fully decarbonised electricity system depends on integrating new technologies that ensure reliability alongside sustainability. However, missing risk markets hinder investment in reliability-enhancing technologies by exposing investors to revenue uncertainty. This study provides the first quantitative assessment of how missing risk markets affect investment decisions in power systems that depend on long-duration energy storage (LDES) for reliability. We develop a two-stage stochastic equilibrium model with risk-averse market participants, which independently sizes power and energy capacity. We apply the method to a case study of a deeply decarbonised power system in Great Britain. The results show that incomplete risk markets reduce social welfare, harm reliability, and discourage investment in LDES and other technologies with volatile revenue streams. Revenue volatility leads to substantial risk premiums and higher financing costs for LDES, creating a barrier to its large-scale deployment. These findings demonstrate the importance of policy mechanisms that hedge revenue risk to lower the cost of capital and accelerate investment in reliability-enhancing, zero-carbon technologies

Figures (5)

• Figure 1: Left: Installed capacity by technology in the risk-neutral case. Right: Investments under complete risk markets across mean–CVaR weights ($\delta$), reported as change in installed capacity by technology relative to the risk-neutral case. The storage duration is approximately 15 and 116 hours for BESS and LDES, respectively.
• Figure 2: Changes in social welfare* between complete and fully incomplete cases (% of risk-neutral total system costs) and in average energy price and EUE relative to the risk-neutral case.
• Figure 3: Investments under incomplete risk markets across mean–CVaR weights($\delta$), reported as change in installed capacity by technology relative to the complete risk markets case.
• Figure 4: Percentage change in LDES power and energy capacity investments (incomplete–complete) across mean–CVaR weights($\delta$). Labels show the associated changes in MW/MWh.
• Figure 5: Effect of fully incomplete markets on WACC under varying levels of risk aversion for storage assets.