by Olivia Chen
December 14, 2016

Olivia Chen GTM Research: FERC’s recent Notice of Proposed Rulemaking would allow energy storage to better integrate and ultimately actively participate in organized electricity markets. Energy storage isn’t new to wholesale electricity markets. However, energy storage has found its place more easily in ancillary services markets, but struggled to find a place in capacity markets, why is that? What unique characteristics of energy storage do the markets need to accommodate?

Daniel Finn-Foley Senior Analyst, Energy Storage: Capacity markets are an uphill climb for energy storage applications because capacity markets serve a specific need – providing firm capacity to meet shortfall or other grid events to ensure consistent power is provided. Energy storage, as an energy-limited resource, is unable to provide power indefinitely, and thus in any capacity market with open-ended duration requirements, it cannot guarantee power beyond its discharge duration.

This NOPR may help with this, however, as it requires “each RTO/ISO to revise its tariff to clarify that an electric storage resource may de-rate its capacity to meet minimum run-time requirements to provide capacity or other services,” meaning a four-megawatt battery with a one-hour duration could instead provide one megawatt for four hours to meet a four-hour requirement. While this de-rating of capacity is already occurring in limited circumstances, a broad clarification across markets could allow energy storage access to capacity markets in a way that was not explicit before.

Olivia Chen GTM Research: De-rating highlights a unique quality of energy storage; that its delivery of power is variable and controllable. If we think about those characteristics when evaluating energy storage as a technology and a fuel, it really begins to prove what a boon energy storage could be in the context of power delivery and grid operations.

Daniel Finn-Foley Senior Analyst, Energy Storage: The duality of energy storage as a generator and load resource is one of the key issues at the heart of this NOPR. Some markets, such as PJM’s frequency regulation market, recognize this duality and have defined resources for participation, while many others are not currently structured to recognize this and thus, according to the FERC statement, put storage at a disadvantage. Moving from a market structured around traditional generation to one that can accommodate energy storage’s unique characteristics is a significant challenge for both stakeholders and system operators.

Elta Kolo Analyst, Grid Edge: At the same time, we should keep in mind that many people want to avoid creating a path of dependence and favoritism towards one technology. Generally, DER enthusiasts do not want the market to concentrate on one technology, but rather to optimize the broad variety of resources for applications where they are best fit.

Daniel Finn-Foley Senior Analyst, Energy Storage: That has been a key point brought up when considering defining rules specific for energy storage, with some claiming this could give energy storage an unfair advantage compared to other resources. FERC’s opinion on the topic appears to turn the argument on its head, stating that energy storage has a disadvantage and correcting this would provide a level playing field rather than favoring one technology.

Olivia Chen GTM Research: Ultimately, electricity markets are shifting to meet an energy economy that values decentralization and decarbonization. What are the challenges different stakeholders, aggregators, system operators, etc., are up against?

Elta Kolo Analyst, Grid Edge: In the past, demand response programs were designed to solve a specific problem for a utility. Once wholesale markets opened up as an opportunity for demand response, the programs adapted to benefit from the opportunity presented. Now, wholesale markets are being required to facilitate efficiency and innovation to allow for the participation of distributed energy resources. The requirements for adaptation are easier said than done as we will see in coming months.

Daniel Finn-Foley Senior Analyst, Energy Storage: Easier said than done is truly the way to put it, and for energy storage that summarizes navigating existing wholesale market designs perfectly. From the perspective of project developers, there are few markets where energy storage has an explicit resource category, and where one exists it’s often designed for pumped hydro or flywheels and isn’t fully compatible with the unique functionality of other storage options. The PJM frequency response market has shown us that developers are eager to contribute when market structures provide a clear participation model for energy storage, and these proposed rules would provide just that.

Elta Kolo Analyst, Grid Edge: FERC Order 719 allows aggregators to bid demand response from retail customers into the ISO/RTO markets, "unless the laws or regulations of the relevant electric retail regulatory authority do not permit a retail customer to participate." If we bundle storage as one of the aggregated DERs, NOPR does not provide much clarity with respect to the application of FERC Order 719.

Olivia Chen GTM Research: Even if there is some ambiguity, it seems like there is a strong whiff of intentionality in this NOPR. This is especially the case because recently PJM announced some changes to its aggregation rules for seasonal resources which seem to have a bias against certain renewable technologies, such as energy storage. FERC’s proposal seems to be taking a strong position about what kind of energy markets FERC envisions.

Daniel Finn-Foley Senior Analyst, Energy Storage: PJM has been moving towards an open-ended capacity requirement, which some stakeholders argue limits energy storage’s ability (along with that of other seasonal resources) to participate in the market. The new system proposed, which allows for pairing resources with corresponding seasonal availabilities, would go some of the way towards fixing this problem, and energy storage would be well suited to ‘fill the gaps’ in other seasonal resources’ capacity availability.

Elta Kolo Analyst, Grid Edge: When considering the capacity performance rules in the PJM territory, and especially the new ones under FERC consideration filled recently for aggregation of seasonal resources by the RTO, it is important to keep in mind that these new aggregation rules are not yet in effect. The proposed rule changes to aggregation are an improvement to the ones in place for the previous auction. Just because the proposal is with FERC does not mean that the rule changes will be approved in time for the next auction. If the rule changes do not happen in time for the May 2017 capacity auction for delivery year 2020/2021 the existing rules will remain in place.

Daniel Finn-Foley Senior Analyst, Energy Storage: True, but the long-term scope of this NOPR if it moves forward is huge. Per the EIA approximately 60% of the nation’s electricity is served by an ISO or RTO, and these proposed rules would affect every system operator (except ERCOT). To look at just a fraction of the opportunity, capacity payments are slated to be over $10 billion in PJM territory alone for the 2017/2018 delivery year, making this a huge economic opportunity for the energy storage industry. It is difficult to overstate the impact on this currently niche-application industry of a redesign of wholesale energy markets to accommodate energy storage’s unique value, and with regulatory momentum on its side I anticipate the next several years could well be a turning point for the energy storage industry.