Stackelberg Competition Between Merchant and Regulated Storage Investment under Locational Marginal Pricing

Abstract

We investigate the interaction between the regulated and merchant storage investment made by a social planner and a merchant, respectively. We construct a bi-level Stackelberg competition model with a single leader (merchant storage owner) and one follower (the social planner). In the upper level, the merchant storage owner maximizes its profit through storage investment decisions. Given the merchant storage capacity, the social planner makes the regulated storage investment, storage operation, and economic dispatch decisions to minimize the overall system cost in the lower level problem. Both merchant and regulated energy storage is remunerated based on the inter-temporal difference in locational marginal prices (solved by the lower level problem). We show that the regulated storage profit (of the social planner) is always nonnegative if the storage investment cost is convex in the installed storage capacity with no fixed cost. In particular, the regulated storage profit must be zero (non-positive) if the storage investment cost is linear (affine, respectively) in the installed storage capacity. We present a counter-intuitive example to show that higher regulated capital cost may lead to lower merchant storage profit due to transmission line congestion. Numerical experiments are conducted on the IEEE 39-bus test system to validate established results.