2025 AIChE Annual Meeting

(710g) The Value of Storage in Distribution Grid: Balancing Peak Shaving and Arbitrage

Authors

Sungho Shin - Presenter, Uninveristy of Wisconsin-Madison
Dirk Lauinger, Massachusetts Institute of Technology
Deepjyoti Deka, Los Alamos National Laboratory
Electricity demand is rising due to electrification of heating and transportation, increased air conditioning use, and growing compute loads. In Massachusetts alone, distribution companies plan to meet the increased demand by investing billions of dollars in electricity line and substation upgrades (National Grid, 2024). Battery storage can reduce peak demand and the associated investments. However, battery storage deployed for peak shaving is underutilized, often cycling just once per month on average. In theory, storage could participate in electricity markets, when not needed for peak shaving. In practice, distribution companies are typically barred from such participation in deregulated markets due to concerns over market distortion (Joskow, 2008).

Despite these challenges, understanding the value of storage for both peak shaving and market participation is crucial for optimizing grid investments. We investigate this value for arbitrage specifically, since the market for ancillary services is saturating in both the US and the EU (Figgener et al., 2023; California Independent System Operator, 2024). The goal is to inform distribution company investment decisions and state policies governing market participation. We hypothesize that trade-offs between peak shaving and arbitrage are minimal, as peak shaving demand—driven by high local electricity use—should align with periods of high electricity prices caused by broader market demand.

Mathematically, we formulate the decision-making problem of a distribution company investing in and operating battery storage for peak shaving and arbitrage. We frame this problem as a security-constrained capacity expansion planning model, optimizing both investment and operational decisions. We model the limited capacity range of investment options with binary variables, which introduces computational complexity but is necessary to trade off low-capacity high-relative-cost storage investments with high-capacity low-relative-cost distribution line investments.

In a Massachusetts case study, market participation could have generated additional revenues of $8 per kWh of installed storage capacity in 2024—only 1% lower than revenues without peak shaving. These simulated revenues align closely with findings from a New York pilot project, where distribution storage is permitted to participate in electricity markets. Our analysis is based on utility data submitted to the state regulator for approval of future investments. In the few states that allow market participation, the additional revenues are passed on to consumers, ultimately reducing electricity rates.

References

California Independent System Operator. 2023 Special Report on Battery Storage, 2024.

Figgener, C. Hecht, D. Haberschusz, J. Bors, K. G. Spreuer, K.-P. Kairies, P. Stenzel, and D. U. Sauer. The development of battery storage systems in Germany: A market review (status 2023), 2023. arXiv:2203.06762[eess.SY].

L. Joskow. Lessons learned from electricity market liberalization. The Energy Journal, 29(2_suppl):9–42, 2008.

National Grid. Future Grid Plan: Empowering Massachusetts by building a smarter, stronger, cleaner and more equitable energy future, 2024.