New model reveals optimal contracts for long-duration energy storage investment

A new academic paper from Adam Suski, Elina Spyrou, Jacob Mays, and Richard Green tackles a critical challenge in decarbonized power systems: how to design contracts that incentivize investment in long-duration energy storage (LDES). The authors develop a two-stage stochastic equilibrium model that endogenously captures the interactions among contract design, investment capacity, and cost of capital. Unlike previous studies that rely on exogenous revenue or price distributions, their model reflects how market participants adjust their behavior based on contract terms.

Applying the model to a stylized Great Britain case, the researchers find that incomplete risk markets substantially suppress LDES investment. Centrally administered zero-premium contracts can restore risk-neutral investment levels by reducing downside risk, but doing so requires significant expected transfers from consumers to investors. These outcomes are highly sensitive to the cap, floor, and sharing parameters. Bilaterally negotiated contracts largely eliminate expected transfers and reduce sensitivity to those parameters, but provide weaker investment incentives. The authors conclude that policymakers must jointly consider contract and institutional design to balance investment, transfers, and social welfare.