Market Power Challenges and Solutions for Electric Power Storage Resource

Energy storage can enable low-carbon power and resilient power systems. However, market design is critical if a transition to renewables and storage is to result in low costs for customers. Pivotal suppliers with energy storage resources (ESRs) can achieve supernormal profits when allowed to fully participate and set clearing prices in wholesale electricity markets. Additional strategic profit from offers inconsistent with marginal costs can hurt competition and increase customer payments, hindering ongoing transitions to high shares of low marginal cost renewable generation and ESRs in electricity markets. We classify three strategies identified by our bi-level model for achieving additional strategic profits:(1) increased ESR discharge bids,(2) decreased ESR charge bids, and (3) cross-product manipulation to benefit other resources owned by the pivotal ESR supplier. We examine cases on a 25-bus test system with 67% average renewable energy generation where the ESR is commonly pivotal due to congestion. We observe under some circumstances the ESR owner can increase its energy market profits from $10-20/MWh discharged when competitive to $40-250/MWh discharged when strategic. Most increased profit comes from cross-product manipulation aimed at increasing prices to benefit a large co-located or hybridized zero marginal cost wind generator owned by the same entity. Marginal cost-based offer caps commonly applied to other resources could be extended to include ESRs’ intertemporal opportunity costs limit, but these caps do not fully mitigate manipulative crossproduct strategies. Relative inframarginal ESR offers over co-optimized time intervals with energy limits can be used to manipulate clearing quantities and prices and should be closely monitored when ESRs are pivotal suppliers. Requiring inframarginal offer uniformity over cooptimized time intervals shows promise as a policy remedy.

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Recommended citation: L. Lavin, Z. Ningkun, and J. Apt, “Market Power Challenges and Solutions for Electric Power Storage Resources,” Carnegie Mellon Electricity Industry Center Working Papers, 2021.