Economic Capacity Withholding Bounds of Competitive Energy Storage Bidders
Xin Qin, Ioannis Lestas, Bolun Xu
TL;DR
The paper tackles how energy storage participates in competitive electricity markets under price uncertainty, focusing on economic capacity withholding and its impact on social welfare. A theoretical framework is developed that links price forecasts $\hat{\lambda}_t$ (with mean $\mu_t$ and deviation $\sigma_t$) to storage bid curves via a concave end‑value $V_T(e_T)$ and a marginal value $v_t(e_t)$, producing convex discharge bids $O_t(p_t)$ and concave charge bids $D_t(b_t)$. The authors prove that with unbounded price deviations withholding can be unbounded under a fixed mean, while price bounds yield finite bid bounds; they also show that, under certain uncertainty structures, storage withholding can improve overall system cost by offsetting net‑demand uncertainty, aligning storage profits with social welfare. These results are substantiated with agent‑based simulations on ISO‑New England, illustrating how uncertainty informs bidding and can lead to welfare‑enhancing outcomes when information about price and wind uncertainty is shared. The findings suggest that energy storage can be an honest contributor to market efficiency under appropriate policy and forecasting practices, rather than a manipulator, and offer practical guidance for regulator design and market policy in the face of rising storage penetration.
Abstract
Economic withholding in electricity markets refers to generators bidding higher than their true marginal fuel cost, and is a typical approach to exercising market power. However, existing market designs require storage to design bids strategically based on their own future price predictions, motivating storage to conduct economic withholding without assuming market power. As energy storage takes up more significant roles in wholesale electricity markets, understanding its motivations for economic withholding and the consequent effects on social welfare becomes increasingly vital. This paper derives a theoretical framework to study the economic capacity withholding behavior of storage participating in competitive electricity markets and validate our results in simulations based on the ISO New England system. We demonstrate that storage bids can reach unbounded high levels under conditions where future price predictions show bounded expectations but unbounded deviations. Conversely, in scenarios with peak price limitations, we show the upper bounds of storage bids are grounded in bounded price expectations. Most importantly, we show that storage capacity withholding can potentially lower the overall system cost when price models account for system uncertainties. Our paper reveals energy storage is not a market manipulator but an honest player contributing to the social welfare. It helps electricity market researchers and operators better understand the economic withholding behavior of storage and reform market policies to maximize storage contributing to a cost-efficient decolonization.