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Capturing Opportunity Costs of Batteries with a Staircase Supply-Demand Function

In the global pursuit of carbon neutrality, the role of batteries is indispensable. They provide pivotal flexibilities to counter uncertainties from renewables, preferably by participating in electricity markets. Unlike thermal generators, however, the dominant type of cost for batteries is opportunity cost, which is more vague and challenging to represent through bids in stipulated formats. This article shows the opposite yet surprising results: The demand-supply function of an ideal battery, considering its opportunity cost, is a staircase function with no more than five segments, which is a perfect match with existing rules in many real electricity markets. The demand-supply function shifts horizontally with price forecasts and vertically with the initial SOC. These results can be generalized to imperfect batteries and numerous battery-like resources, including battery clusters, air-conditioners, and electric vehicle charging stations, although the number of segments may vary. These results pave the way for batteries to participate in electricity markets.

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