IDEAS home Printed from https://ideas.repec.org/a/eee/appene/v325y2022ics0306261922011680.html
   My bibliography  Save this article

Strategic energy storage investments: A case study of the CAISO electricity market

Author

Listed:
  • Zhao, Dongwei
  • Jafari, Mehdi
  • Botterud, Audun
  • Sakti, Apurba

Abstract

Energy storage can provide a range of revenue streams for investors in electricity markets. However, as their deployments continue to rise, storage will no longer be a player on the sidelines and remain a price-taker, rather, these assets will start to impact prices. In this study, accounting for energy storage as a price-maker and using data from CAISO, we investigate strategic market behavior among competing investors using a non-cooperative game. We establish a centralized optimization problem to compute the market equilibrium. In the game, each investor initially decides on how much to invest and then how to operate their asset over a time horizon. Investors are allowed to deploy different energy storage technologies. Analytically, we show that an increasing number of investors will increase the market competition thereby reducing profits while increasing the total capacity of storage deployed. Numerically, our key findings include: (a) the difference in optimal investments under price-taker and price-maker assumptions, (b) as wind and solar assets expand under different resource-mix scenarios, there is a corresponding non-monotonic variation in arbitrage potential for energy storage, (c) when competition is intense and investors are allowed to invest in different technologies, a slight increase in storage technology performance can significantly improve an investor’s profit share, (d) when the arbitrage opportunity increases with renewables, longer duration storage technologies may gain an advantage, (e) Li-ion batteries dominate the market under low-moderate renewable energy penetration or with steep energy-capacity cost reductions in the future.

Suggested Citation

  • Zhao, Dongwei & Jafari, Mehdi & Botterud, Audun & Sakti, Apurba, 2022. "Strategic energy storage investments: A case study of the CAISO electricity market," Applied Energy, Elsevier, vol. 325(C).
    • Handle: RePEc:eee:appene:v:325:y:2022:i:c:s0306261922011680
    DOI: 10.1016/j.apenergy.2022.119909
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0306261922011680
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.apenergy.2022.119909?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Prasad, Abhnil A. & Taylor, Robert A. & Kay, Merlinde, 2017. "Assessment of solar and wind resource synergy in Australia," Applied Energy, Elsevier, vol. 190(C), pages 354-367.
    2. Robert Gibbons, 1997. "An Introduction to Applicable Game Theory," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 127-149, Winter.
    3. William Novshek, 1985. "On the Existence of Cournot Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(1), pages 85-98.
    4. Jafari, Mehdi & Botterud, Audun & Sakti, Apurba, 2020. "Estimating revenues from offshore wind-storage systems: The importance of advanced battery models," Applied Energy, Elsevier, vol. 276(C).
    5. Dongwei Zhao & Mehdi Jafari & Audun Botterud & Apurba Sakti, 2022. "Strategic Storage Investment in Electricity Markets," Papers 2201.02290, arXiv.org, revised Mar 2022.
    6. Das, Trishna & Krishnan, Venkat & McCalley, James D., 2015. "Assessing the benefits and economics of bulk energy storage technologies in the power grid," Applied Energy, Elsevier, vol. 139(C), pages 104-118.
    7. Afzal S. Siddiqui, Ramteen Sioshansi, and Antonio J. Conejo, 2019. "Merchant Storage Investment in a Restructured Electricity Industry," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    8. Fares, Robert L. & Meyers, Jeremy P. & Webber, Michael E., 2014. "A dynamic model-based estimate of the value of a vanadium redox flow battery for frequency regulation in Texas," Applied Energy, Elsevier, vol. 113(C), pages 189-198.
    9. Gordon W. Leslie & David I. Stern & Akshay Shanker & Michael T. Hogan, 2020. "Designing electricity markets for high penetration of zero or low marginal cost intermittent energy sources," CCEP Working Papers 2002, Centre for Climate & Energy Policy, Crawford School of Public Policy, The Australian National University.
    10. Pandžić, H. & Dvorkin, Y. & Carrión, M., 2018. "Investments in merchant energy storage: Trading-off between energy and reserve markets," Applied Energy, Elsevier, vol. 230(C), pages 277-286.
    11. Mallapragada, Dharik S. & Sepulveda, Nestor A. & Jenkins, Jesse D., 2020. "Long-run system value of battery energy storage in future grids with increasing wind and solar generation," Applied Energy, Elsevier, vol. 275(C).
    12. Shafiee, Soroush & Zamani-Dehkordi, Payam & Zareipour, Hamidreza & Knight, Andrew M., 2016. "Economic assessment of a price-maker energy storage facility in the Alberta electricity market," Energy, Elsevier, vol. 111(C), pages 537-547.
    13. Mazzoni, Stefano & Ooi, Sean & Nastasi, Benedetto & Romagnoli, Alessandro, 2019. "Energy storage technologies as techno-economic parameters for master-planning and optimal dispatch in smart multi energy systems," Applied Energy, Elsevier, vol. 254(C).
    14. Cárdenas, Bruno & Swinfen-Styles, Lawrie & Rouse, James & Hoskin, Adam & Xu, Weiqing & Garvey, S.D., 2021. "Energy storage capacity vs. renewable penetration: A study for the UK," Renewable Energy, Elsevier, vol. 171(C), pages 849-867.
    15. Cruise, James R. & Flatley, Lisa & Zachary, Stan, 2018. "Impact of storage competition on energy markets," European Journal of Operational Research, Elsevier, vol. 269(3), pages 998-1012.
    16. Kramer, Anja & Krebs, Vanessa & Schmidt, Martin, 2021. "Strictly and Γ-robust counterparts of electricity market models: Perfect competition and Nash–Cournot equilibria," Operations Research Perspectives, Elsevier, vol. 8(C).
    17. McPherson, Madeleine & Tahseen, Samiha, 2018. "Deploying storage assets to facilitate variable renewable energy integration: The impacts of grid flexibility, renewable penetration, and market structure," Energy, Elsevier, vol. 145(C), pages 856-870.
    18. Huang, Qisheng & Xu, Yunjian & Courcoubetis, Costas, 2020. "Stackelberg competition between merchant and regulated storage investment in wholesale electricity markets," Applied Energy, Elsevier, vol. 264(C).
    19. de Sisternes, Fernando J. & Jenkins, Jesse D. & Botterud, Audun, 2016. "The value of energy storage in decarbonizing the electricity sector," Applied Energy, Elsevier, vol. 175(C), pages 368-379.
    20. Santos, Sérgio F. & Fitiwi, Desta Z. & Cruz, Marco R.M. & Cabrita, Carlos M.P. & Catalão, João P.S., 2017. "Impacts of optimal energy storage deployment and network reconfiguration on renewable integration level in distribution systems," Applied Energy, Elsevier, vol. 185(P1), pages 44-55.
    21. Luo, Xing & Wang, Jihong & Dooner, Mark & Clarke, Jonathan, 2015. "Overview of current development in electrical energy storage technologies and the application potential in power system operation," Applied Energy, Elsevier, vol. 137(C), pages 511-536.
    22. Kayal, Partha & Chanda, C.K., 2015. "Optimal mix of solar and wind distributed generations considering performance improvement of electrical distribution network," Renewable Energy, Elsevier, vol. 75(C), pages 173-186.
    23. Deetjen, Thomas A. & Martin, Henry & Rhodes, Joshua D. & Webber, Michael E., 2018. "Modeling the optimal mix and location of wind and solar with transmission and carbon pricing considerations," Renewable Energy, Elsevier, vol. 120(C), pages 35-50.
    24. Sakti, Apurba & Botterud, Audun & O’Sullivan, Francis, 2018. "Review of wholesale markets and regulations for advanced energy storage services in the United States: Current status and path forward," Energy Policy, Elsevier, vol. 120(C), pages 569-579.
    25. Mallapragada, Dharik S. & Papageorgiou, Dimitri J. & Venkatesh, Aranya & Lara, Cristiana L. & Grossmann, Ignacio E., 2018. "Impact of model resolution on scenario outcomes for electricity sector system expansion," Energy, Elsevier, vol. 163(C), pages 1231-1244.
    26. Benjamin F. Hobbs & J. S. Pang, 2007. "Nash-Cournot Equilibria in Electric Power Markets with Piecewise Linear Demand Functions and Joint Constraints," Operations Research, INFORMS, vol. 55(1), pages 113-127, February.
    27. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
    28. Rahmanifard, Hamid & Plaksina, Tatyana, 2019. "Hybrid compressed air energy storage, wind and geothermal energy systems in Alberta: Feasibility simulation and economic assessment," Renewable Energy, Elsevier, vol. 143(C), pages 453-470.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dongwei Zhao & Sarah Coyle & Apurba Sakti & Audun Botterud, 2022. "Market Mechanisms for Low-Carbon Electricity Investments: A Game-Theoretical Analysis," Papers 2212.06984, arXiv.org, revised Aug 2023.
    2. Topalović, Zejneba & Haas, Reinhard & Sayer, Marlene, 2024. "Economic benefits of PHS and Li-ion storage. Study cases: Austria and Bosnia and Herzegovina," Applied Energy, Elsevier, vol. 362(C).
    3. Li, Canbing & Chen, Dawei & Liu, Xubin & Shahidehpour, Mohammad & Yang, Hanyu & Liu, Hui & Huang, Wentao & Wang, Jianxiao & Deng, Xiang & Zhang, Qiying, 2024. "Fault mitigation mechanism to pave the way to accommodate over 90% renewable energy in electric power systems," Applied Energy, Elsevier, vol. 359(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dongwei Zhao & Mehdi Jafari & Audun Botterud & Apurba Sakti, 2022. "Strategic Storage Investment in Electricity Markets," Papers 2201.02290, arXiv.org, revised Mar 2022.
    2. Das, Choton K. & Bass, Octavian & Kothapalli, Ganesh & Mahmoud, Thair S. & Habibi, Daryoush, 2018. "Optimal placement of distributed energy storage systems in distribution networks using artificial bee colony algorithm," Applied Energy, Elsevier, vol. 232(C), pages 212-228.
    3. Javier L'opez Prol & Wolf-Peter Schill, 2020. "The Economics of Variable Renewables and Electricity Storage," Papers 2012.15371, arXiv.org.
    4. Das, Choton K. & Bass, Octavian & Mahmoud, Thair S. & Kothapalli, Ganesh & Mousavi, Navid & Habibi, Daryoush & Masoum, Mohammad A.S., 2019. "Optimal allocation of distributed energy storage systems to improve performance and power quality of distribution networks," Applied Energy, Elsevier, vol. 252(C), pages 1-1.
    5. Dongwei Zhao & Sarah Coyle & Apurba Sakti & Audun Botterud, 2022. "Market Mechanisms for Low-Carbon Electricity Investments: A Game-Theoretical Analysis," Papers 2212.06984, arXiv.org, revised Aug 2023.
    6. Marija Miletić & Hrvoje Pandžić & Dechang Yang, 2020. "Operating and Investment Models for Energy Storage Systems," Energies, MDPI, vol. 13(18), pages 1-33, September.
    7. Parra, David & Mauger, Romain, 2022. "A new dawn for energy storage: An interdisciplinary legal and techno-economic analysis of the new EU legal framework," Energy Policy, Elsevier, vol. 171(C).
    8. Mao, Jiachen & Jafari, Mehdi & Botterud, Audun, 2022. "Planning low-carbon distributed power systems: Evaluating the role of energy storage," Energy, Elsevier, vol. 238(PA).
    9. Maximilian Parzen & Fabian Neumann & Addrian H. Van Der Weijde & Daniel Friedrich & Aristides Kiprakis, 2021. "Beyond cost reduction: Improving the value of energy storage in electricity systems," Papers 2101.10092, arXiv.org, revised Jul 2022.
    10. Antweiler, Werner, 2021. "Microeconomic models of electricity storage: Price Forecasting, arbitrage limits, curtailment insurance, and transmission line utilization," Energy Economics, Elsevier, vol. 101(C).
    11. Jafari, Mehdi & Botterud, Audun & Sakti, Apurba, 2022. "Decarbonizing power systems: A critical review of the role of energy storage," Renewable and Sustainable Energy Reviews, Elsevier, vol. 158(C).
    12. Huang, Qisheng & Xu, Yunjian & Courcoubetis, Costas, 2020. "Stackelberg competition between merchant and regulated storage investment in wholesale electricity markets," Applied Energy, Elsevier, vol. 264(C).
    13. De Vivero-Serrano, Gustavo & Bruninx, Kenneth & Delarue, Erik, 2019. "Implications of bid structures on the offering strategies of merchant energy storage systems," Applied Energy, Elsevier, vol. 251(C), pages 1-1.
    14. MITRAILLE Sébastien & MOREAUX Michel, 2007. "Inventories and Endogenous Stackelberg Hierarchy in Two-period Cournot Oligopoly," LERNA Working Papers 07.02.223, LERNA, University of Toulouse.
    15. Cheayb, Mohamad & Marin Gallego, Mylène & Tazerout, Mohand & Poncet, Sébastien, 2022. "A techno-economic analysis of small-scale trigenerative compressed air energy storage system," Energy, Elsevier, vol. 239(PA).
    16. Chen, Yang & Odukomaiya, Adewale & Kassaee, Saiid & O’Connor, Patrick & Momen, Ayyoub M. & Liu, Xiaobing & Smith, Brennan T., 2019. "Preliminary analysis of market potential for a hydropneumatic ground-level integrated diverse energy storage system," Applied Energy, Elsevier, vol. 242(C), pages 1237-1247.
    17. Merrick, James H. & Bistline, John E.T. & Blanford, Geoffrey J., 2024. "On representation of energy storage in electricity planning models," Energy Economics, Elsevier, vol. 136(C).
    18. Pusceddu, Elian & Zakeri, Behnam & Castagneto Gissey, Giorgio, 2021. "Synergies between energy arbitrage and fast frequency response for battery energy storage systems," Applied Energy, Elsevier, vol. 283(C).
    19. Ting Zhang & Shuaishuai Cao & Lingying Pan & Chenyu Zhou, 2020. "A Policy Effect Analysis of China’s Energy Storage Development Based on a Multi-Agent Evolutionary Game Model," Energies, MDPI, vol. 13(23), pages 1-35, November.
    20. de Sisternes, Fernando J. & Jenkins, Jesse D. & Botterud, Audun, 2016. "The value of energy storage in decarbonizing the electricity sector," Applied Energy, Elsevier, vol. 175(C), pages 368-379.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:appene:v:325:y:2022:i:c:s0306261922011680. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/405891/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.