Energy storage can absorb variability from the rising number of wind andsolar power producers. Storage is different from the conventional generatorsthat have traditionally balanced supply and demand on fast time scales due toits hard energy capacity constraints, dynamic coupling, and low marginal costs.These differences are leading system operators to propose new mechanisms forenabling storage to participate in reserve and real-time energy markets. Thepersistence of market power and gaming in electricity markets suggests thatthese changes will expose new vulnerabilities. We develop a new model of strategic behavior among storages in energybalancing markets. Our model is a two-stage game that generalizes a classicmodel of capacity followed by Bertrand-Edgeworth price competition byexplicitly modeling storage dynamics and uncertainty in the pricing stage. Byapplying the model to balancing markets with storage, we are able to comparecapacity and energy-based pricing schemes, and to analyze the dynamic effectsof the market horizon and energy losses due to leakage. Our first key findingis that capacity pricing leads to higher prices and higher capacitycommitments, and that energy pricing leads to lower, randomized prices andlower capacity commitments. Second, we find that a longer market horizon andhigher physical efficiencies lead to lower prices by inducing the storage tocompete to have their states of charge cycled more frequently.
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