Financial Incentives for Joint Storage Planning and Operation in Energy and Regulation Markets

Abstract

We analyze two market mechanisms for energy storage investment and operation: first, socially optimal storage investment with centralized operation, second, profit-maximizing storage investment with deregulated operation. For mechanism i), under which a social planner centrally optimizes storage investment and operation (in both energy and regulation markets), we prove that the revenue collected from storage operation exactly covers the investment and operation cost at a social optimum. For mechanism ii), where a profit maximizing firm strategically determines the siting and sizing of batteries, we evaluate two financial incentive mechanisms that encourage energy storage investment by offering a tax credit based on the installed storage capacity and the amount of energy delivered from the storage, respectively. When the storage capital cost is mid-range, these two policies are shown to achieve higher installed storage capacity and lower social cost compared to the case without such incentives. When the capital cost is high, however, these two policies can lead to over-investment and higher social cost.