Energy storage systems in energy and ancillary markets: A backwards induction approach

Battery storage technologies have developed to the point that some are mature enough to serve as a generation resource. However, whether a battery can generate profits by interacting solely in energy markets is unclear. Meanwhile, FERC order 784 requires electricity exchange markets in the U.S. to install the necessary technical equipment for batteries to supply ancillary services [12]. We suggest that current economic studies on the battery energy storage system (ESS) are limited because they do not explore possibilities to use battery storage in ancillary (reserve) markets. Applying battery ESS to ancillary service could be profitable enough to cover investment costs. In this study, we consider a battery storage operator's best strategy each day, using backwards induction. We analyze the storage device as an exhaustible resource with a limited number of charging cycles and operating years. Based on this approach, we build a revenue model to maximized the net present value of the battery energy storage system revenues by applying the three-staged-method employed by Shcherbakova et al. [14]. We found that the battery in unable to cover its costs, and it does not use all the cycles available in its lifetime. This result, however, may be a function of the limits of our analytical approach. (C) 2015 Elsevier Ltd. All rights reserved.