An Insurance Contract Design to Boost Storage Participation in the Electricity Market

Abstract

Energy storage technologies are key to improving grid flexibility in the presence of increasing amounts of intermittent renewable generation. We propose an insurance contract that suitably compensates energy storage systems for providing flexibility. Such a contract provides a wider range of market opportunities for these systems while also incentivizing higher renewable penetration in the grid. We consider a day-ahead market in which generators, including renewables and storage owners, bid to be scheduled for the next operating day. Due to production uncertainty, renewable generators may be unable to meet their day-ahead production schedule, and thus be subject to a penalty. As a hedge against these penalties, we propose an insurance contract between a renewable producer and a storage owner, in which the storage reserves some energy to be used in case of renewable shortfalls. We show that such a contract incentivizes the renewable player to bid higher, thus increasing renewable participation in the electricity mix. It also provides an extra source of revenue for storage owners that may not be profitable with a purely arbitrage-based strategy in the day-ahead market. Further, we prove this contract is economically beneficial for both players. We validate our analysis through two case studies.