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The value of storage in electricity distribution: The role of markets

Dirk Lauinger, Deepjyoti Deka, Sungho Shin

TL;DR

The study addresses how market-participation constraints affect storage investment and operation in deregulated electricity grids. It develops an optimization framework that integrates investment decisions, hourly operation, and nonconvex market-participation constraints, and applies it to a Nantucket, MA case study. The results show that arbitrage and capacity-market participation can provide substantial additional savings, yet under current costs market participation does not drive storage deployment beyond local distribution needs; only at very low storage costs does market participation incentivize larger deployments, underlining the framework’s utility for regulatory audit and policy design. The work offers a practical tool for regulators to balance local reliability needs with market benefits while guarding against unintended market distortions.

Abstract

Electricity distribution companies deploy battery storage to defer grid upgrades by reducing peak demand. In deregulated jurisdictions, such storage often sits idle because regulatory constraints bar participation in electricity markets. Here, we develop an optimization framework that, to our knowledge, provides the first formal model of market participation constraints within storage investment and operation planning. Applying the framework to a Massachusetts case study, we find that market participation could deliver similar savings as peak demand reduction. Under current conditions, market participation does not increase storage investment, but at very low storage costs, could incentivize deployment beyond local distribution needs. This might run contrary to the separation of distribution from generation in deregulated markets. Our framework can identify investment levels appropriate for local distribution needs.

The value of storage in electricity distribution: The role of markets

TL;DR

The study addresses how market-participation constraints affect storage investment and operation in deregulated electricity grids. It develops an optimization framework that integrates investment decisions, hourly operation, and nonconvex market-participation constraints, and applies it to a Nantucket, MA case study. The results show that arbitrage and capacity-market participation can provide substantial additional savings, yet under current costs market participation does not drive storage deployment beyond local distribution needs; only at very low storage costs does market participation incentivize larger deployments, underlining the framework’s utility for regulatory audit and policy design. The work offers a practical tool for regulators to balance local reliability needs with market benefits while guarding against unintended market distortions.

Abstract

Electricity distribution companies deploy battery storage to defer grid upgrades by reducing peak demand. In deregulated jurisdictions, such storage often sits idle because regulatory constraints bar participation in electricity markets. Here, we develop an optimization framework that, to our knowledge, provides the first formal model of market participation constraints within storage investment and operation planning. Applying the framework to a Massachusetts case study, we find that market participation could deliver similar savings as peak demand reduction. Under current conditions, market participation does not increase storage investment, but at very low storage costs, could incentivize deployment beyond local distribution needs. This might run contrary to the separation of distribution from generation in deregulated markets. Our framework can identify investment levels appropriate for local distribution needs.
Paper Structure (33 sections, 8 theorems, 39 equations, 9 figures)

This paper contains 33 sections, 8 theorems, 39 equations, 9 figures.

Table of Contents

  1. Introduction
  2. Background and motivation
  3. Research questions and contributions
  4. Prior work
  5. Structure
  6. Notation.
  7. Problem description and optimization model
  8. Investment cost
  9. Operating cost
  10. Total cost
  11. Market participation constraints
  12. Theoretical takeaways
  13. Case study
  14. Case study selection
  15. Data
  16. ...and 18 more sections

Key Result

Proposition 1

The capacity functions $\bar{x}_{rn}$ and $\bar{x}_{\mathrm{gnc}}$ are nondecreasing concave piecewise linear for all $r \in \mathcal{R} \setminus \{\mathrm{g}\}$, $n \in \mathcal{N}$, and $c \in \mathcal{C}$.

Figures (9)

  • Figure 1: Electric load and generation capacity in the absence of new investments.
  • Figure 2: Nantucket electricity load and price in 2024.
  • Figure 3: Scarcity events in the ISO-NE in 2024; locational marginal prices and load are normalized by their peak values in the year ($2173.15/MWh and 57MW).
  • Figure 4: Indicative cost savings from storage in distribution grids.
  • Figure 5: Supply decisions for the year 2025, normalized by installed capacity.
  • ...and 4 more figures

Theorems & Definitions (19)

  • Proposition 1
  • proof
  • Remark 1
  • Proposition 2
  • proof
  • Proposition 3
  • proof
  • Proposition 4
  • proof
  • Proposition 5
  • ...and 9 more