  Energy storage technologies are key to improving grid flexibility in the
presence of increasing amounts of intermittent renewable generation. We propose
an insurance contract that suitably compensates energy storage systems for
providing flexibility. Such a contract provides a wider range of market
opportunities for these systems while also incentivizing higher renewable
penetration in the grid. We consider a day-ahead market in which generators,
including renewables and storage owners, bid to be scheduled for the next
operating day. Due to production uncertainty, renewable generators may be
unable to meet their day-ahead production schedule, and thus be subject to a
penalty. As a hedge against these penalties, we propose an insurance contract
between a renewable producer and a storage owner, in which the storage reserves
some energy to be used in case of renewable shortfalls. We show that such a
contract incentivizes the renewable player to bid higher, thus increasing
renewable participation in the electricity mix. It also provides an extra
source of revenue for storage owners that may not be profitable with a purely
arbitrage-based strategy in the day-ahead market. Further, we prove this
contract is economically beneficial for both players. We validate our analysis
through two case studies.
