Implications of bid structures on the offering strategies of merchant energy storage systems

Abstract

Energy storage Systems (ESS) may play a pivotal role in the cost-efficient integration of renewable energy sources. Integrating large volumes of grid-scale energy storage into electricity markets, however, raises questions related to their profitability and impact on electricity prices. This paper explores the implications of different bid structures on the strategic behavior of a storage owner that participates in the wholesale market and is able to influence prices to maximize its profits. We conduct a comparative analysis on four bid structures present in existing markets and the scientific literature: (i) simple quantity-based bids, (ii) simple price-based bids, (iii) price-quantity pairs bids and (iv) complex bidding in which the ESS owner provides full information of its technical characteristics through the bids. The decision problem of the ESS owner is formulated as a bilevel programming model, where the upper-level problem represents the profit maximization of the ESS and the lower-level problem simulates possible market clearing outcomes. These bilevel models are reformulated as equivalent mixed-integer linear programming problems by means of the Karush-Kuhn-Tucker optimality conditions, the strong duality theorem and the Big-M method. In a case study, we show that when the ESS owner is uncertain about the market clearing outcome, the bid structure affects the ESS’s profitability and, to a lesser extent, the market’s efficiency and the system’s generation costs.