Battery Operations in Electricity Markets: Strategic Behavior and Distortions

Anunrojwong, Jerry; Balseiro, Santiago R.; Besbes, Omar; Xu, Bolun

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https://hdl.handle.net/2142/130331 Copy

Description

Title

Battery Operations in Electricity Markets: Strategic Behavior and Distortions

Author(s)

• Anunrojwong, Jerry
• Balseiro, Santiago R.
• Besbes, Omar
• Xu, Bolun

Issue Date

2025-09-17

Keyword(s)

• Energy storage
• Market power
• Electricity markets
• Day-ahead
• Real-time
• Game theory
• Price of anarchy

Abstract

Electric power systems are undergoing a major transformation as they integrate intermittent renewable energy sources, and batteries to smooth out variations in renewable energy production. As privately-owned batteries grow from their role as marginal “price-takers” to significant players in the market, a natural question arises: How do batteries operate in electricity markets, and how does the strategic behavior of decentralized batteries distort decisions compared to centralized batteries? We propose an analytically tractable model that captures salient features of the highly complex electricity market. We derive in closed form the resulting battery behavior and generation cost in three operating regimes: (i) no battery, (ii) centralized battery, and (ii) decentralized profit-maximizing battery. We establish that a decentralized battery distorts its discharge decisions in three ways. First, there is quantity withholding, i.e., discharging less than centrally optimal. Second, there is a shift in participation from day-ahead to real-time, i.e., postponing some of its discharge from day-ahead to real-time. Third, there is reduction in real-time responsiveness, or discharging less in response to smoothing real-time demand than centrally optimal. We also quantify the impact of the battery market power on total system cost via the Price of Anarchy metric, and prove that it is always between 9/8 and 4/3. That is, incentive misalignment always exists, but it is bounded even in the worst case. We calibrate our model to real data from Los Angeles and Houston. Lastly, we show that competition is very effective at reducing distortions, but many market power mitigation mechanisms backfire, and lead to higher total cost. The work provides stakeholders with a framework to understand and detect market power from batteries. It also shows that the potential loss from battery market power is relatively small compared to the cost reduction achievable from having enough battery capacity in the system.

Publisher

Allerton Conference on Communication, Control, and Computing

Series/Report Name or Number

2025 61st Allerton Conference on Communication, Control, and Computing Proceedings

ISSN

2836-4503

Type of Resource

Text

Genre of Resource

Conference Paper/Presentation

Language

eng

Handle URL

https://hdl.handle.net/2142/130331&&

Copyright and License Information

Copyright 2025 owned by the authors.

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