An efficient and incentive-compatible market design for energy storage participation

With the increasing penetration of renewables, energy storage systems (ESS) are becoming growingly important due to its peak-shaving ability. However, the current market mechanism is not well prepared for the participation of the ESSs. Firstly, the current bidding structure requires the ESSs to submit separate parameters for charging and discharging, but this structure is inconsistent with their operating characteristics. Secondly, the current settlement rule settles the ESSs according to time-variant locational marginal prices (LMP), but the diminishing intertemporal price spreads will encourage them to behave strategically. To this end, this paper proposes a novel bidding structure, a corresponding clearing model and a modified settlement rule: The bidding structure for the ESSs includes cost functions with respect to cycling mileages and valuation functions for ending stored energy. Thereafter the independent system operators (ISO) will manage the ESSs' state of charge (SOC) and clear the market. A settlement rule based on Vickery-Clarke-Groves (VCG) mechanism and Asymmetric Nash Bargaining theory is adopted to incentivize the ESSs to behave honestly. Numerical tests are conducted to illustrate the social welfare efficiency, incentive compatibility and computational tractability of the proposed mechanism.