FERC Action on Electric Storage Could be Transformational

Alerts / February 28, 2018

In an action that industry observers have hailed as opening the floodgates for electric energy storage and sounding the death knell for peaking power plants across the nation, the Federal Energy Regulatory Commission (FERC) has issued a Final Rule requiring every Regional Transmission Organization (RTO) and Independent System Operator (ISO) in the U.S. to revise its tariff to establish a participation model for electric storage resources that is tailored to their physical and operational characteristics. This is potentially a very big deal. Energy storage can be used not just to smooth the output of variable energy resources, like wind and solar, but to arbitrage between peak and off-peak hours, similar to how incremental and decremental financial bids in day-ahead markets allow market participants to arbitrage between day-ahead and real-time energy prices. Once large-scale deployment of energy storage resources becomes feasible and profitable, the result will be transformative for the energy markets, as there is likely to be substantial convergence of peak and off-peak prices.

While various aspects of the rulemaking will likely be challenged by parties on all sides of the spectrum, the primary battlefield will now shift to the RTO/ISO stakeholder processes. There, critical details will be hashed out before each RTO and ISO files its individual proposed market rules governing how storage resources can participate in its region. The results of these processes will go a long way toward determining whether the prognostications of industry observers were prescient or folly, and just how soon energy storage becomes a transformational force.

FERC’s Final Rule, officially known as Order 841, requires that each RTO and ISO adopt a participation model for storage that:

  1. ensures that each storage resource using the participation model is eligible to provide all capacity, energy, and ancillary services that it is technically capable of providing in the RTO/ISO market, including those not procured through the organized market, such as blackstart, primary frequency response service, and reactive power service;
  2. ensures that every storage resource using the participation model can be dispatched and can set the wholesale market clearing price, as both a wholesale seller and a wholesale buyer, consistent with existing market rules governing when resources can set wholesale prices;
  3. accounts for the physical and operational characteristics of electric storage resources through bidding parameters or other means; and
  4. establishes a minimum size requirement that does not exceed 10 kW.

In addition, electric storage resources must be permitted to purchase energy from the RTO/ISO markets at the wholesale locational marginal price, provided the energy is to be resold back to those markets after it is stored. Each RTO and ISO must file its proposed tariff changes within 270 days and implement the provisions within one year after its filing.

The Final Rule leaves it to the RTOs and ISOs to decide whether to propose changes to the minimum run times and must offer requirements in their tariffs to address issues relating to the physical and operational characteristics of storage resources. However, each RTO/ISO will be required to demonstrate that its market rules allow storage resources to provide capacity. For example, the New York ISO already limits commitments to one four-hour interval per day, while the California ISO requires that storage resources be available only during peak hours.

Other issues left to the RTOs and ISOs to work out in their stakeholder process include (1) whether to allow fast-responding storage resources to provide certain ancillary services without an energy schedule; (2) the methodology by which storage resources available for manual dispatch, as a wholesale buyer and seller, will be held harmless for manual dispatch by being eligible for make-whole payments; (3) the means by which a storage resource’s physical and operational characteristics will be taken into account (e.g., through bidding parameters) and whether to require storage resources using the participation model to submit information regarding their physical and operational characteristics; (4) how storage resources using the participation model will be allowed to represent their physical, operational and commercial circumstances; and (5) how a storage resource’s retail commitments will be considered in determining the services it is capable of providing.

While FERC’s move represents a significant step in the direction of allowing greater market penetration by electric storage resources, a great deal of work remains to be done. For electric storage resources to become transformational, there still need to be technological advances that reduce costs substantially from current levels, adoption of policies at the state level that promote the financing and development of electric storage resources, and adoption of participation models in the RTOs and ISOs that appropriately address the issues FERC has left open and allow storage resources to capture the full value they can bring to the market.

Authorship Credit: Glenn S. Benson.

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