  Economic withholding in electricity markets refers to generators bidding
higher than their true marginal fuel cost, and is a typical approach to
exercising market power. However, existing market designs require storage to
design bids strategically based on their own future price predictions,
motivating storage to conduct economic withholding without assuming market
power. As energy storage takes up more significant roles in wholesale
electricity markets, understanding its motivations for economic withholding and
the consequent effects on social welfare becomes increasingly vital. This paper
derives a theoretical framework to study the economic capacity withholding
behavior of storage participating in competitive electricity markets and
validate our results in simulations based on the ISO New England system. We
demonstrate that storage bids can reach unbounded high levels under conditions
where future price predictions show bounded expectations but unbounded
deviations. Conversely, in scenarios with peak price limitations, we show the
upper bounds of storage bids are grounded in bounded price expectations. Most
importantly, we show that storage capacity withholding can potentially lower
the overall system cost when price models account for system uncertainties. Our
paper reveals energy storage is not a market manipulator but an honest player
contributing to the social welfare. It helps electricity market researchers and
operators better understand the economic withholding behavior of storage and
reform market policies to maximize storage contributing to a cost-efficient
decolonization.
