Energy storage operation and electricity market design: On the market power of monopolistic storage operators

The rapid growth of the share of energy generated via renewable sources highly challenges grid stability. Flexibility is key to balance the electricity supply and demand. As a relatively new player in the energy market, the Energy Storage System (ESS) is capable of providing such flexibility, acting as both a consumer and producer. Since the Directive (EU) 2019/944 of the European Union requires ESSs to be operated by an independent market player, ESSs are becoming an important player in different electricity markets. Crucially, it is difficult for, e.g., market-monitoring authorities, to compare the bid cost functions to the true opportunity costs of an ESS. Motivated by this, in this paper we elaborate on the potential of an ESS to exercise market power in a liberalized electricity market. In particular, we analyze how a monopolistic ESS operator may influence short-run market outcomes, e.g., prices and system costs, depending on different market designs including a nodal, a zonal, and a uniform pricing system. For this purpose, we propose a four-stage Stackelberg game where the monopolistic ESS operator first decides on its day-ahead market bids (level 1), followed by day-ahead market clearing (level 2), after which the ESS submits bids to the real-time balancing market (level 3), which is then cleared (level 4). Relying on a widely used case study, we illustrate that some market designs may be more favorable for the ESS operator, whereas other ones may be more attractive from the regulator’s point of view of minimizing the overall system costs.