The Federal Energy Regulatory Commission (FERC) has taken steps over the past few months to address integration of electric storage into the market. In November 2016, FERC issued a Notice of Proposed Rulemaking (NOPR) to establish rules for participation by energy storage in wholesale electricity markets, and in December 2016, proposed to revise the pro forma interconnection procedures and agreement for large generators to “explicitly include electric storage resources.” On January 19, FERC released a policy statement clarifying that electric storage resources may recover both cost-based and market-based rates if certain conditions apply. Numerous parties have filed comments on FERC’s proposed rule changes. While FERC’s proposed rules have not yet been finalized, market participants seeking to bring storage resources to the wholesale electricity marketplace should understand the implications of these recent efforts to incorporate electric storage on a wider scale.
Energy Storage Policy Statement
On January 19, FERC released a policy statement providing guidance on how electric storage resources may recover both cost-based and market-based rates. Because electric storage can provide multiple services to the grid almost simultaneously, they may fit more than one traditional asset class (i.e., generation versus transmission) and provide both cost-based and market-based rate services. In an effort to maximize the full benefits, the policy statement outlines three criteria rooted in FERC precedent that should allow electric storage resources to recover cost-based rates and participate in wholesale markets using market-based rates:
Commissioner Cheryl LaFleur (who subsequent to issuance of the policy statement became Acting Chairman of FERC) dissented to the new policy statement, noting its rationale was both “flawed in its conclusions and premature in its timing.” In her view, the statement made “sweeping conclusions” about potential impacts of multiple payment streams on pricing in the market, and generally lacked guidance on how the Commission would evaluate effects on competition.
Electric Storage NOPR
The policy statement was issued just weeks before FERC expects to receive comments on a much larger initiative regarding electric storage. On November 17, 2016, FERC issued a NOPR aimed at removing market barriers for electric storage resources and distributed energy resource (DER) aggregators in the capacity, energy, and ancillary service markets. The issuance of the NOPR reflects FERC’s belief that, as these technologies become more cost-effective and are used on a much broader scale, there will be a greater need for RTOs/ISOs to establish “participation models” that account for their size and physical characteristics. The NOPR proposes a final rule that would require each RTO and ISO to (i) create market rules for electric storage resources to participate in wholesale markets; (ii) define DER aggregators as wholesale market participants; and (iii) establish rules for each aggregator to participate in the wholesale market under the participation model that best accounts for their physical and operational characteristics. The rules for aggregators would also apply to other types of distributed resources, including community solar.
Electric storage is unique in that it can provide multiple services on the grid almost simultaneously. FERC is concerned though that full utilization of electric storage will be impeded if storage resources are forced to participate in the market under participation models for traditional asset classes (e.g., transmission, distribution or demand response) that do not reflect all of the characteristics of energy storage. Absent market rules tailored to the technical realities for electric storage, companies have been forced to use preexisting participation models that may not adequately address storage’s capabilities. Electric storage resources can participate in the California Independent System Operator (CAISO) energy market as “participating generators, non-generator resources, pumped storage hydro units, or demand response resources,” but can provide only “regulation service” in the Midcontinent Independent System Operator (MISO) market. FERC believes new, asset-specific participation models will enhance competition and result in full utilization of benefits of storage to the grid.
Under the NOPR, RTOs and ISOs would be required to amend their tariffs to establish “participation models” for electric storage that, at a minimum, (i) ensure storage resources are eligible to provide capacity, energy, and ancillary services in wholesale electricity markets; (ii) establish bidding parameters; (iii) ensure storage resources can be dispatched and can set the wholesale market clearing price as both a wholesale seller and buyer; (iv) establish a minimum size requirement not to exceed 100 kW; and (v) require that energy sold from the market to storage resources be resold back to the market at the wholesale locational marginal price (LMP).
The NOPR’s comment period ended on February 13, 2017. Extensive comments were filed by electric storage companies, utility companies and RTO/ISOs. While most parties submitting comments approved the Commission’s overarching goals, positions differed on a number of significant issues:
Energy Storage Market
As electric storage technologies become more cost-effective, the prospect of them being added at scale becomes imminent. Twenty-nine states and the District of Colombia have a Renewables Portfolio Standard (RPS). With these commitments driving the procurement of more solar, wind and geothermal resources, the need for system flexibility increases as the grid incorporates more variable and intermittent sources of electricity. In January, the second installment of the Department of Energy’s Quadrennial Energy Review (QER 1.2) reported that the third quarter of 2016 saw the most project financing for electric storage since the first release of the report in 2015. Overall corporate investments in storage amounted to approximately $650 million, a fivefold increase from Q3 2015. Recent Department of Energy statistics demonstrate that 1.56 GW of non-hydro electric storage are currently offered on the grid through 456 separate projects; a figure that suggests the storage market could significantly surpass prior growth predictions of 2.0 GW by 2021.
Energy Storage Under New Administration and a Temporarily Limited FERC
FERC’s next steps remain to be seen, both substantively and from a timing standpoint. As noted, since FERC issued the NOPR in November the former Chair of the Commission, Norman Bay, has resigned. As a result, FERC currently lacks a quorum and is unable to issue the final rule until at least one Commission seat is filled by the new administration. Three of the five seats on the Commission remain to be filled by President Trump, leaving the Commission ripe for a Republican majority. It is unclear how long these vacancies will remain open. Naming the next Commissioner (which would reestablish a quorum) it likely to take a minimum of 2–3 months and could take much longer. Further, even after this occurs, the Commission may choose to wait until the remaining vacancies are filled before it takes action—a process that could take all or most of this year.
The newly appointed commissioners could have different views than their predecessors. Further, Acting Chairman LaFleur, who already expressed disagreement with the policy statement, is expected to remain on the Commission until the end of her term in June 2019. As a result, a range of different outcomes is possible. Policies to promote storage would be consistent with the Trump Administration’s support for infrastructure development. The Administration recently released a priority list of fifty emergency and national security projects, including “Energy Storage and Grid Modernization in California” and the “Plains and Eastern Electric Transmission Line and TransWest Express Transmission” projects, which would deliver wind energy for local distribution. Many observers believe, though, that the new Administration is less receptive to fostering the development of renewable energy than President Obama. If commissioners appointed by President Trump share this view, they may be reluctant to take further action to promote storage.
The fundamental driver for renewable energy, however, remains state Renewable Portfolio Standards. As additional renewable energy resources are added and cost-effectiveness of storage technologies continues to improve, increased utilization of storage will become increasingly important. FERC will need to continue developing its policy, either by general rulemaking or RTO/ISO-specific tariff rulings. The NOPR and policy statement are an important starting point, but many issues will need to be resolved in the future.