This paper presents a numerical modeling study of coupled thermodynamic, multiphase fluid flow and heat transport associated with underground compressed air energy storage (CAES) in lined rock caverns. Specifically, we explored the concept of using concrete lined caverns at a relatively shallow depth for which constructing and operation costs may be reduced if air tightness and stability can be assured. Our analysis showed that the key parameter to assure long-term air tightness in such a system was the permeability of both the concrete lining and the surrounding rock. The analysis also indicated that a concrete lining with a permeability of less than 1 x 10(-18) m(2) would result in an acceptable air leakage rate of less than 1%, with the operation pressure range between 5 and 8 MPa at a depth of 100 m. It was further noted that capillary retention properties and the initial liquid saturation of the lining were very important. Indeed, air leakage could be effectively prevented when the air-entry pressure of the concrete lining is higher than the operation air pressure and when the lining is kept at relatively high moisture content. Our subsequent energy-balance analysis demonstrated that the energy loss for a daily compression and decompression cycle is governed by the air-pressure loss, as well as heat loss by conduction to the concrete liner and surrounding rock. For a sufficiently tight system, i.e., for a concrete permeability of less than 1 x 10(-18) m(2), heat loss by heat conduction tends to become proportionally more important. However, the energy loss by heat conduction can be minimized by keeping the air-injection temperature of compressed air closer to the ambient temperature of the underground storage cavern. In such a case, almost all the heat loss during compression is gained back during subsequent decompression. Finally, our numerical simulation study showed that CAES in shallow rock caverns is feasible from a leakage and energy efficiency viewpoint. Our numerical approach and energy analysis will next be applied in designing and evaluating the performance of a planned full-scale pilot test of the proposed underground CAES concept. (C) 2011 Elsevier Ltd. All rights reserved.