  The use of energy storage to balance electric grids is increasing and, with
it, the importance of operational optimisation from the twin viewpoints of cost
and system stability. In this paper we assess the real option value of
balancing reserve provided by an energy-limited storage unit. The contractual
arrangement is a series of American-style call options in an energy imbalance
market (EIM), physically covered and delivered by the store, and purchased by
the power system operator. We take the EIM price as a general regular
one-dimensional diffusion and impose natural economic conditions on the option
parameters. In this framework we derive the operational strategy of the storage
operator by solving two timing problems: when to purchase energy to load the
store (to provide physical cover for the option) and when to sell the option to
the system operator. We give necessary and sufficient conditions for the
finiteness and positivity of the value function -- the total discounted cash
flows generated by operation of the storage unit. We also provide a
straightforward procedure for the numerical evaluation of the optimal
operational strategy (EIM prices at which power should be purchased) and the
value function. This is illustrated with an operational and economic analysis
using data from the German Amprion EIM.
