Battery Operations in Electricity Markets: Strategic Behavior and Distortions

Abstract

Battery storage can reduce electricity generation costs by shifting energy across time, but as privately owned batteries become large, they may also be able to exert market power. We study how this market power distorts storage decisions in a two-settlement electricity market with stochastic demand and heterogeneous generator flexibility. We compare centralized battery operations, which minimize generation cost, with decentralized battery operations, in which each battery maximizes its own profit. For a baseline model with linear inverse supply curves, we characterize equilibrium battery policies and generation costs in closed form. Relative to centralized operations, a strategic battery distorts storage decisions in three ways: it withholds discharge, shifts participation from the day-ahead market to the real-time market, and responds too weakly to real-time demand fluctuations. These distortions raise generation cost, but the resulting efficiency loss admits tight, distribution-free bounds. We measure the resulting efficiency loss through the Price of Anarchy metric, which compares the cost reduction achieved by centralized batteries to that achieved by strategic batteries. For a single battery, the Price of Anarchy lies between $9/8$ and $4/3$; with $n$ competing batteries, the Price of Anarchy is bounded above by $1+1/(n(n+2))$. Similar bounds continue to hold in richer settings with capacity constraints, battery inefficiency, and virtual bidding. We also show why market power mitigation is subtle: interventions that target one distortion can backfire by redirecting behavior toward another and increasing system cost. Numerical experiments calibrated to California and Texas markets show that losses from a single strategic battery are meaningful but moderate, and that even limited battery competition brings the Price of Anarchy close to one across the specifications we study.