Strategic Capacity Withholding by Energy Storage in Electricity Markets

Although previous work has demonstrated the ability of large energy storage (ES) units to exercise market power by withholding their capacity, it has adopted modeling approaches exhibiting certain limitations and has not analyzed the dependency of the extent of exercised market power on ES operating properties. In this paper, the decision making process of strategic ES is modeled through a bi-level optimization problem; the upper level determines the optimal extent of capacity withholding at different time periods, maximizing the ES profit, while the lower level represents endogenously the market clearing process. This problem is solved after converting it to a Mathematical Program with Equilibrium Constraints (MPEC) and linearizing the latter through suitable techniques. Case studies on a test market quantitatively analyze the extent of capacity withholding and its impact on ES profit and social welfare for different scenarios regarding the power and energy capacity of ES.