Impact of storage on the efficiency and prices in real-time electricity markets

We study the effect of energy-storage systems in dynamic real-time electricity markets. We consider that demand and renewable generation are stochastic, that real-time production is affected by ramping constraints, and that market players seek to selfishly maximize their profit. We distinguish three scenarios, depending on the owner of the storage system: (A) the supplier, (B) the consumer, or (C) a stand-alone player. In all cases, we show the existence of a competitive equilibrium when players are price-takers (they do not affect market prices). We further establish that under the equilibrium price process, players' selfish responses coincide with the social welfare-maximizing policy computed by a (hypothetical) social planner. We show that with storage the resulting price process is smoother than without. We determine empirically the storage parameters that maximize the players' revenue in the market. In the case of consumer-owned storage, or a stand-alone storage operator (scenarios B and C), we find that they do not match socially optimal parameters. We conclude that consumers and the stand-alone storage operator (but not suppliers) have an incentive to under-dimension their storage system. In addition, we determine the scaling laws of optimal storage parameters as a function of the volatility of demand and renewables. We show, in particular, that the optimal storage energy capacity scales as the volatility to the fourth power.