An Alternative Settlement Rule for State-of-Charge-Limited Resources in Electricity Markets

Standard two settlement markets compute the total profits of their participants as a sum of day-ahead (DA) profits and incremental real-time (RT) profits. This procedure was originally designed for conventional generators, which can always deliver their day-ahead (DA) awarded schedule in real time because their capacity is invariant across market clearings. Energy storage resources, by contrast, are state-of-charge (SOC) limited. Therefore, their ability to honor a DA award in real time depends on the SOC available at the moment of dispatch, a quantity that can differ materially from what was assumed at the DA stage. According to the current rules in CAISO, whenever the storage state of charge (SOC) is not sufficient to support the day-ahead award the RT market may impose an instruction to "buy back" or "sell back" that may lead to a monetary loss that is covered by the system operator via uplifts in the bid cost recovery (BCR) scheme. These circumstances have resulted in storage resources capturing a disproportionate share of uplift payments---totaling approximately $75.2 million in CAISO between 2022 and 2025. This paper formalizes the asymmetry between SOC-unlimited (generator) and SOC-limited (storage) resources and proposes an alternative settlement rule in which the total storage profit is computed as the maximum between real-time only compensation and the existing day ahead plus incremental real-time compensation. Through our analysis and a case study based on a realistic version of the California system, we demonstrate that while the proposed rule does not guarantee non-negative profits in all cases, it can reduce - and in favorable conditions eliminate - the negative profit outcomes that trigger make-whole BCR payments.