When energy storage reduces social welfare

- We study interactions between generation and energy storage sectors in an electricity market
- If the generation sector is perfectly competitive, adding storage is always welfare-enhancing
- If the generation sector is strategic, adding perfectly competitive or strategic storage can reduce social welfare

This paper examines the potential welfare effects of storage under different market structures. This includes combinations of perfectly competitive and strategic generation and storage sectors, and standalone and generator-owned storage. We demonstrate that if the generation sector is perfectly competitive and does not own storage, then storage cannot be welfare-diminishing. Otherwise, generator-owned storage or standalone storage in a market with strategic generating firms can reduce welfare compared to the no-storage case. This contradicts conventional wisdom that adding firms to an imperfectly competitive market typically reduces welfare losses.