Increased variable generation penetration without reinforcing the power grid with additional flexibility in the form of fast responding reserves necessitates existing conventional generation fleet to undergo cycling operations that are detrimental to its economics and lifespan. This paper presents a systematic methodology to estimate cycling costs related to the ancillary service and start-up/shutdown operations of various generators. Production costing programs are performed in the Institute of Electrical and Electronics Engineers 24 bus reliability test system to quantify the cycling costs associated with system operation. Two methods are investigated to reduce system cycling costs, namely, incorporating the cycling cost components within the generation offers submitted to the dispatch programs and integration of bulk energy storage. Simulation results were also used to assess the potential of storage projects to earn economic incentive when additional cycling cost components are incorporated within generation offers. Copyright © 2014 John Wiley & Sons, Ltd.