by Jeff St. John
September 11, 2020

Last month, New York state grid operator NYISO officially started offering batteries and other energy storage resources a novel opportunity: a chance to earn money as both wholesale and retail energy resources, not just one or the other. 

On August 26, NYISO enabled the software to allow batteries, pumped hydro facilities and other storage resources to submit offers to buy and sell energy in its real-time and day-ahead markets, and to provide fast-responding ancillary services like frequency regulation to keep the grid stable. It also opened up its Installed Capacity market auctions to storage resources, giving them a chance to offer their services to support grid reliability during times of peak electricity demand

“We might be the first ISO that actually provides full participation,” NYISO CEO Rich Dewey said in an interview shortly before the software launch. “Battery developers now have that revenue opportunity.” 

To be clear, NYISO isn’t the first regional transmission organization (RTO) or independent system operator (ISO) to open its markets to energy storage. Others have allowed batteries to earn money for providing long-term capacity or serving as fast-acting frequency regulation or other forms of ancillary services. And the Federal Energy Regulatory Commission's Order 841 mandates that every ISO and RTO open its markets to energy storage — a major opportunity for batteries, given that ISO and RTO transmission networks provide electricity to about two-thirds of the country. 

What makes NYISO’s Order 841 implementation so noteworthy is that it’s the first to lay out “dual participation” opportunities for batteries. Instead of being forced to choose between either wholesale market participation or other money-making services, such as helping utilities manage their distribution grids or reducing customers’ demand charges, NYISO’s model allows them to do both — as long as they adhere to rules to ensure they’re always available when they’re needed and aren’t gaming the market. 

That’s a big deal, considering that batteries become more valuable as they’re able to “stack” more and more services, said Daniel Finn-Foley, energy storage director at research firm Wood Mackenzie.

“The result is that you’re actually getting compensated for the value you’re providing,” Finn-Foley said. “If you’re providing services to another entity — a utility or host entity — why shouldn’t you be able to provide services to the ISO markets?” 

It’s a particularly big deal in New York, where batteries are seen as an integral part of the mix the state will need to meet its ambitious clean-energy and carbon-reduction goals. Those include 6 gigawatts of distributed solar by 2025 and 9 gigawatts of offshore wind by 2035, as well as 3 gigawatts of energy storage by 2030 to help integrate that intermittent renewable energy into its grid. 

New York City and its surrounding population centers are particularly fertile ground for energy storage, given the region’s massive appetite for energy, its relatively high level of fossil-fueled electricity, and the limits to expanding the transmission capacity that could bring it otherwise plentiful clean energy from upstate. 

Breaking the technical barriers to dual participation 

Battery development in New York City has been slow to take off, at least compared to California. New York City fire department safety regulations limit battery installations in buildings, making it hard for projects to capture the demand-charge reduction value that’s driven much of California’s behind-the-meter capacity. And while California has offered behind-the-meter battery incentives for years now, New York just launched its incentive program last year

But customer-sited batteries are now looking for revenue opportunities that aren’t limited by a building’s load profile, Finn-Foley said. New York City’s battery installations are mainly focused on helping utility Con Edison reduce load and congestion on its distribution circuits through "non-wires solutions" solicitations like its Brooklyn-Queens Neighborhood Program. Other projects are replacing fossil-fuel peaking capacity that is slated to close due to air pollution regulations.  

NYISO’s new market rules could allow batteries to serve these previously mutually exclusive money-making opportunities. They could also unlock the value of behind-the-meter batteries meant to provide backup power and demand-charge reduction at times when they aren’t needed for those services. 

“Dual participation is going to ensure you’re not locked out of revenue streams, which is a key component of most business models [that] behind-the-meter storage is pursuing in New York,” Finn-Foley said. 

That’s a contrast to the wholesale market participation model devised by California grid operator CAISO, which requires aggregated behind-the-meter batteries and other distributed energy resources to commit to market participation 24 hours a day, 7 days a week. That restriction, along with expensive telemetry and charging energy requirements, has dissuaded would-be market participants from enrolling in the program.  

Tapping these multiple revenue streams isn’t a simple task, however, particularly for smaller-scale batteries aggregated to meet the 100-kilowatt threshold for wholesale market participation. NYISO’s rules set some stringent requirements for systems to maintain connection to its real-time dispatch system, bid their availability into its market operations system and closely track how they respond in real time. 

New York is already testing how dual participation will work under these complex dispatchability and measurement and verification rules. We’ve covered one key pilot project featuring Shell New Energies-owned microgrid developer GI Energy that’s been providing real-time connections between Con Ed and NYISO. 

In that pilot, Con Ed has first dispatch rights to use the batteries for distribution grid support and pays for those services. When Con Ed doesn’t need them, GI Energy can play their capacity into NYISO markets via dispatches translated by a “multipoint communications system” from U.K.-based distributed energy resource management system provider Smarter Grid Solutions

But is it worth the effort?

Just because a battery can tap multiple revenue streams doesn’t mean that those multiple revenue streams will be lucrative enough to justify the effort, however. That will depend on a whole host of still-undetermined factors, ranging from how NYISO and utilities set up the supporting programs that allow batteries to capture revenue for the services they provide, to how federal regulations on NYISO’s market structures play out. 

“NYISO is blazing a trail for dual use of storage in wholesale and retail service, pursuant to Order 841,” said Jason Burwen, vice president of policy at the Energy Storage Association trade group. But as ISOs and RTOs implement the changes Order 841 requires, “a lot of focus is shifting to how...these markets actually work when you bring storage to them.” 

Take the open question of how New York utilities will implement their value of distributed energy resources, or VDER, tariffs. These tariffs, created as part of New York’s sprawling Reforming the Energy Vision initiative, are designed to coordinate the cost and compensation of DERs including rooftop solar, behind-the-meter batteries and grid-responsive loads based on their system value, which can mean charging more for energy consumed during times of peak grid demand and less when electricity is plentiful or tying values to specific grid locations.

“In New York, it really is location, location, location,” Finn-Foley said, with certain pockets of New York City and surrounding towns likely representing very high values. “But recognizing that value is incredibly difficult.”

New York utilities are still deploying the smart meters that will allow them to establish VDER rates across their systems. That leaves would-be energy storage developers unsure of how to assess their future distribution grid values.

FERC imposes additional obstacles

Another energy storage valuation problem is now emerging on the NYISO market front. Over the past six months, FERC has rejected several of NYISO’s requests to change “buyer-side mitigation” rules in ways that would allow carbon-free resources to compete more effectively against fossil-fueled power plants that provide most of its capacity. While the details are complex, the upshot is that under FERC’s decisions, batteries may be forced to use minimum bid prices that could be too high to win a place in NYISO’s Installed Capacity market auctions, effectively blocking them from the market.  

“To the extent that markets are attempting to adjust to state policy, FERC is providing a counterweight, saying, 'No, federal authority here will take precedence over state authority,'” Burwen said. “If you’re a storage resource [provider] that was thinking you were going to participate in capacity markets in NYISO, that’s now more challenging.” 

On the other hand, falling battery prices and the growing sophistication of storage developers are likely to reduce the negative effect of FERC’s decisions, said NYISO CEO Dewey. “The treatment by the FERC is really all around the subsidies that they need to get from the New York state programs or any other programs to make them economic,” he said. But batteries will “certainly, within a year, be able to make profits without subsidy.” 

NYC looks increasingly attractive for battery deployment

That view is backed up by Ananya Chaurey, energy market analyst at ICF. In the next several years, it’s likely that the cost of battery systems will fall below the costs of the combustion turbine units equipped with emissions controls that are required to operate in the New York City area, making batteries cost-competitive as an alternative, he said. 

What’s more, NYISO is making changes that are likely to increase the value of energy and ancillary services in the New York City area, he said. That’s also going to alter the formulas that determine the minimum prices of resources, giving batteries another advantage, according to Chaurey. 

The bigger question in determining how NYISO’s market rules will affect batteries’ economic competitiveness may lie in how complicated its rules for participation end up being and how quickly storage developers adapt to them, said Mike Alter, ICF’s senior consultant on distributed energy resources. 

“It puts a really important emphasis on trying to work out some of the kinks of dual participation," Alter said. Some resources, and especially batteries with inherent duration limitations, face "multiple obligations, some of which can even conflict with each other."

Developers will have to manage charge and discharge schedules against multiple obligations to utilities and wholesale market bids, and comply with capacity program must-offer obligations, all while ensuring availability for the utility services they’ve promised. The opportunities are big, but so is the pile of work to be done.