With the reduction of cost

large-capacity energy storage unit is playing an increasingly important role in modern power systems. When a merchant energy storage unit participates in the power market

its arbitrage problem can be modeled via a bilevel program. The lower-level problem simulates power market clearing and gives the nodal price

based on which the upper-level problem maximizes the arbitrage profit of energy storage. To solve this bilevel problem

the conventional method replaces the lower level problem with its KKT optimality conditions and further performs linearization. However

because the size of the market clearing problem grows with the scale of the power system and the number of periods

the resulting MILP (mixed-integer linear program) is very challenging to solve. This paper proposes a decomposition method to address the bilevel energy storage arbitrage problem. First

the locational marginal price at the storage connection node is expressed as a piecewise constant function in the storage bidding strategy

so the market clearing problem can be omitted. Then

the storage bidding problem is formulated as a mixed-integer linear program

which contains only a few binary variables. Numeric experiments validate the proposed method is exact and highly efficient.