Pumped storage and cost saving

The pump storage technique allows the use of cheap thermal electricity at periods of low demand to restore water resources that can be used to generate electricity at periods of peak demand. When the thermal plant and the hydro plant are managed by the same operator, the two plants are used in an efficient way to substitute low cost fuel for high cost fuel. The paper first analyzes the efficient use of the technology when the outputs at each period are given. We determine the frontier between the storage and no-storage solutions and its sensibility to cost variations. We then determine the optimal dispatch given the intertemporal preferences of electricity consumers. The model gives emphasis to the economic driver of the technology that is the net social gain from transferring social surplus from off peak to peak period.