Energy Storage, Executive Insight, Policy & Regulation

Leveling the Field for Energy Storage: Can Markets Figure it out?

“Once a new technology rolls over you, if you’re not part of the steamroller, you’re part of the road.”
-Stewart Brand, author and editor of the Whole Earth Catalog

For more than a decade, the Federal Energy Regulatory Commission (FERC) has been trying to determine how to treat electrical energy storage technologies. The fact that electricity historically could not be stored required real-time balancing of supply and demand to maintain the integrity of the grid.

 As a result, market structures, market rules and market participants all have been organized around the dichotomies of load versus generation, generation versus transmission, transmission versus distribution, and regulated distribution services versus competitive offerings. Slotting storage neatly into any one of these buckets, however, does not take advantage of the full spectrum of value propositions that such facilities have to offer.

As storage technologies evolve and commercialize, the power sector has to adjust.

Load versus Generation

Since Edison invented the light bulb, and then had to develop an electricity industry to light it, generation has been subordinate to load.  State regulators have jurisdiction over load and retail rates whereas FERC oversees wholesale rates paid to generators.  Although pumped storage clearly embodied aspects of both, FERC drew a new line in 2001 and determined that the sale of energy to a storage provider for purposes of charging a storage facility is a conversion process and therefore a FERC jurisdictional wholesale transaction (Norton Energy Storage, L.L.C., 95 FERC ¶ 61,476).

Blurring the lines between load and generation continued in other contexts, with FERC Order 719 incorporating load into regulated wholesale markets in 2008 and FERC Order No. 745 setting the wholesale price to be paid for distribution level demand response in 2012.  The dual functions of generation and load will continue to create jurisdictional issues for regulators who traditionally oversee one aspect but not the other.

Generation versus Transmission

Although generation and transmission have been recognized as substitutes for planning purposes, storage can be considered transmission for operational purposes.  In 2006, FERC recognized that a pumped hydro storage facility such as the Lake Elsinore Advanced Pumped Storage Project (LEAPS) can be considered an advanced transmission technology. However, FERC subsequently denied recovery of project costs under regulated rates, based in part on the CAISO observation that, “The LEAPS pumped storage project, already determined to be an advanced transmission technology, is not ‘transmission’ and the costs of LEAPS should not be included in the TAC [transmission access charge].”

FERC subsequently found a clean case in which to establish precedent, granting Western Grid Development, LLC’s request that its proposed battery projects be considered wholesale transmission facilities and compensated under regulated transmission rates with awarded incentive rate treatments (130 FERC ¶ 61,056).  Around the same time, Beacon Power successfully argued that its flywheel technology could provide ancillary services at a faster rate and therefore should receive higher compensation. FERC Order 755 agreed and directed market operators to compensate energy storage for inter-temporal opportunity costs when the facility provides frequency response during times of the day when it otherwise could be charging.

Transmission versus Distribution

Energy storage also can be a distribution asset, providing coincident and non-coincident peak shaving benefits, and creating significant value in the form of reduced wholesale market capacity obligations, reduced distribution capacity charges or both. The same energy storage facility can be considered a transmission asset if connected to a high voltage system, a distribution asset if connected to low voltage, or distributed generation if behind the end-user’s meter, but connection point is not definitive to functionality.  Existing definitions do not apply.

Regulated versus Competitive

FERC’s recent order on energy storage tackles the difficult question of whether energy storage should be compensated as a regulated or competitive service.  With its 2017 policy statement in 158 FERC ¶ 61,051 and FERC Order 841 in 2018, FERC explicitly recognizes the multiple and often simultaneous value propositions energy storage offers and the need for regulated rates as well as competitive markets to compensate for those values.  Allowing the same asset to receive both forms of compensation overturns the difficulties FERC acknowledged in its LEAPS decision and implicitly challenges long-held regulatory tenets protecting against cross-subsidization between regulated and competitive functions.  Although parts of the industry already are pushing back and identifying the operational difficulties of implementing FERC’s order, it is precisely those operational difficulties that indicate why institutional changes are required.

The playing field is never level for new technologies.  With the rules of the game developed by and for the status quo, disruptive technologies can either bulldoze over existing infrastructure or fight to get into the game.  For the past decade, energy storage has struggled to compete on the dichotomies of electricity’s home turf.  As the regulatory referees and operating coaches adjust the rules of the game to accommodate storage, be ready to watch a new game unfold.

About the author: Tanya Bodell is the Executive Director of Energyzt, a global collaboration of energy experts who create value for investors in energy through actionable insights. Visit www.energyzt.com. She can be reached at: [email protected] or 617-416-0651.