There is growing interest in the use of grid-level storage to smooth
variations in supply that are likely to arise with increased use of wind and
solar energy. Energy arbitrage, the process of buying, storing, and selling
electricity to exploit variations in electricity spot prices, is becoming an
important way of paying for expensive investments into grid-level storage.
Independent system operators such as the NYISO (New York Independent System
Operator) require that battery storage operators place bids into an hour-ahead
market (although settlements may occur in increments as small as 5 minutes,
which is considered near "real-time"). The operator has to place these bids
without knowing the energy level in the battery at the beginning of the hour,
while simultaneously accounting for the value of leftover energy at the end of
the hour. The problem is formulated as a dynamic program. We describe and
employ a convergent approximate dynamic programming (ADP) algorithm that
exploits monotonicity of the value function to find a revenue-generating
bidding policy; using optimal benchmarks, we empirically show the computational
benefits of the algorithm. Furthermore, we propose a distribution-free variant
of the ADP algorithm that does not require any knowledge of the distribution of
the price process (and makes no assumptions regarding a specific real-time
price model). We demonstrate that a policy trained on historical real-time
price data from the NYISO using this distribution-free approach is indeed
effective.Comment: 28 pages, 11 figure