The Value of Hydropower as a Grid-Scale Storage Resource: A Commodity Market Approach

Energy storage plays a crucial role in modern power systems, providing services such as grid stability, frequency regulation, and load balancing. Currently, storage systems earn revenue by offering these grid services and through energy arbitrage—buying electricity when prices are low and selling when prices are high. However, as storage deployment expands, arbitrage profitability declines due to market saturation and narrowing price differentials (Sioshansi et al., 2009; Li et al., 2024). In ERCOT, for example, 2024 saw reduced arbitrage potential due to moderate weather and increased storage capacity. This trend underscores the need for new business models that more fully recognize and compensate the value energy storage provides to the power system.This paper presents empirical research on the full value of energy storage and proposes a commodity-market-based framework to better align compensation mechanisms with system-wide benefits. We examine hydropower as a proxy for grid-scale storage, using exogenous variation in reservoir storage volume to estimate causal effects on (1) real-time electricity prices and (2) risk premiums, measured by the day-ahead to real-time price spread, in the Northwestern United States between May 2022 and November 2024. Employing fixed-effects and lagged dependent variable models, we control for unobserved heterogeneity across balancing authorities and capture dynamic price behavior.We find that a 10% increase in reservoir storage volume reduces real-time prices by approximately 6% and lowers risk premiums by about 5%, indicating that storage mitigates short-term supply–demand imbalances. These effects are most pronounced during grid stress events, such as cold snaps, suggesting that stored energy provides significant value when the system is under strain. The results are robust to dynamic pricing effects and highlight storage’s role in reducing both price volatility and systemic risk.Overall, stored energy substantially reduces system costs and alleviates grid stress, yet most electricity markets lack mechanisms that compensate storage for these benefits. As revenue from arbitrage and grid services diminishes with increased deployment, alternative business models are needed to reward storage for its intrinsic function—potentially through the creation of a stand-alone commodity, such as stored energy itself (see the winter reserve mechanism in Switzerland). Our findings provide empirical support for developing future market frameworks that more accurately capture the risk-reducing and reliability-enhancing contributions of grid-scale energy storage.