Locational Energy Storage Bid Bounds for Facilitating Social Welfare Convergence

Abstract

This paper proposes a novel method to generate bid bounds that can serve as offer caps for energy storage in electricity markets to help reduce system costs and regulate potential market power exercises. We derive the bid bounds based on a tractable multi-period economic dispatch chance-constrained formulation that systematically incorporates the uncertainty and risk preference of the system operator. The key analytical results verify that the bounds effectively cap storage bids across all uncertainty scenarios with a guaranteed confidence level. We show that bid bounds decrease as the state of charge increases but rise with greater netload uncertainty and risk preference. We test the effectiveness of the proposed pricing mechanism based on the 8-bus ISO-NE test system, including agent-based storage bidding models. Simulation results demonstrate that the proposed bid bounds effectively align storage bids with the social welfare objective and outperform existing deterministic bid bounds. Under 30% renewable capacity and 20% storage capacity, the bid bounds contribute to an average reduction of 0.17% in system cost, while increasing storage profit by an average of 10.16% across various system uncertainty scenarios and bidding strategies. These benefits scale up with increased storage economic withholding and storage capacity.