Optimal policies for battery operation and design via stochastic optimal control of jump diffusions

Abstract

To operate a production plant, one requires considerable amounts of power. With a wide range of energy sources, the price of electricity changes rapidly throughout the year, and so does the cost of satisfying the electricity demand. Battery technology allows storing energy while the electric power is lower, saving us from purchasing at higher prices. Thus, adding batteries to run plants can significantly reduce production costs. This thesis proposes a method to determine the optimal battery regime and its maximum capacity, minimizing the production plant's energy expenditures. We use stochastic differential equations to model the dynamics of the system. In this way, our spot price mimics the Uruguayan energy system's historical data: a diffusion process represents the electricity demand and a jump-diffusion process - the spot price. We formulate a corresponding stochastic optimal control problem to determine the battery's optimal operation policy and its optimal storage capacity. To solve our stochastic optimal control problem, we obtain the value function by solving the Hamilton-Jacobi-Bellman partial differential equation associated with the system. We discretize the Hamilton-Jacobi-Bellman partial differential equation using finite differences and a time splitting operator technique, providing a stability analysis. Finally, we solve a one-dimensional minimization problem to determine the battery's optimal capacity.