Optimal Storage Operation Under Demand Charge

We study the optimal operation of energy storage operated by a consumer who owns intermittent renewable generation and faces (possibly random) fluctuating electricity prices and demand charge. We formulate the optimal storage operation problem as a finite horizon dynamic program, with an objective of minimizing the expected total cost (the sum of energy cost and demand charge). The incorporation of demand charge faces the consumer with more complicated trade-offs on storage operation, e.g., discharging the storage when the energy price is relatively low may not save energy cost, but could help to save the demand charge if the net demand is high. We establish an important threshold structure for an optimal storage operation policy, which enables us to implement the optimal policy in realistic settings with random electricity prices. Numerical results demonstrate that the characterized optimal threshold policy significantly outperforms the policy that is shown to be optimal without demand charge in the literature, even at a low-demand charge rate 6$/kW.