by Julian Spector
April 28, 2020

Maryland may be known more for crab cakes than distribution grid innovation, but it’s doing something with energy storage that other states could learn from.

Lithium-ion batteries perform regular commercial service in a sufficient number of states and markets that technical questions about their competence are largely moot (not that this stops utilities elsewhere from piloting basic operational capabilities — you know who you are). In Maryland, following a law Gov. Larry Hogan signed in 2019, the state pushed utilities to test uncertain regulatory constructs to see if they pan out over a 10-year period. The projects, submitted earlier this month, toggle the variables of which entity owns the asset and which operates it.

“There’s still a lot of regulatory ground to break on energy storage,” said Jason Burwen, vice president of policy at the U.S. Energy Storage Association. “This question of separating ownership and operational control to derive more efficiency from the assets is particularly interesting.”

If these models succeed, they could reduce regulatory risk enough for private investment to follow. That could unlock better grid reliability at lower prices for customers. Consider this a forward-looking companion to last week's breakdown of the different ways existing battery projects monetize multiple value streams. 

Why does this matter?

The Maryland projects seek to balance two realities. Batteries can do many things for the grid, some of which may be useful to different parties; and, in Maryland’s restructured electricity sector, distribution utilities handle the delivery of power, while private generators compete in PJM’s wholesale markets. 

Those rules were designed to keep the markets fair and open by preventing utilities from using ratepayer-funded projects to distort the market competition. But batteries scramble the old division between transmission and distribution on the one hand and generation on the other; the same battery project could technically serve both roles. And using the same piece of equipment to serve multiple roles promises a more efficient form of infrastructure investment.

“Competition has been the way we bring savings to customers” in restructured markets like Maryland's, Burwen noted. “If you can increase capital utilization rates, that’s a way to bring savings to customers, too.”

Conversely, preventing battery projects from serving multiple roles could result in redundant infrastructure. The reason monopolies build and manage power lines is because it would be wasteful to have different companies building multiple versions of the same infrastructure to serve the same territory. Without some creative business models, ratepayers could miss out on the savings associated with more efficient deployment of storage hardware.

Try something new

The Maryland projects seek a way out of that conundrum by toggling which entity owns the equipment and which oversees its operation. The resulting possible combinations are:

  • Utility owned and utility operated
  • Utility owned and third-party operated
  • Third-party owned and utility operated
  • Third-party owned and third-party operated (essentially a virtual power plant)

The utility filings add color to those categories. Potomac Edison wants to work with Convergent Energy + Power on a 1.75-megawatt/8.4-megawatt-hour battery at Town Hill, a rural circuit beset by outages caused by trees falling on lines. The battery will allow the utility to island the feeder and keep it powered up while it responds to an outage.

A utility investing in reliability is nothing new. The twist here is that Convergent will own and operate the system; Potomac Edison pays an annual contract price to reserve the battery for potential backup power on 20 days with high outage risks. The rest of the time, Convergent can use its asset to bid into the PJM wholesale markets and make money however it chooses. The wires utility doesn’t profit from that revenue, but it gets a better price for reliability service because Convergent has an alternative revenue stream.

Potomac Edison’s other battery pilot will work the same — reserved for backing up a rural feeder for up to 20 high-risk days a year — except the utility owns it. The revenue Convergent earns in the wholesale markets will pass to the utility’s customers as savings. The filing doesn’t offer many details on how that works — if it’s the utility’s battery, but Convergent’s name is on the papers for market participation, does that satisfy the market referees? What is clear is that Potomac Edison will get to compare the costs and benefits of buying the equipment itself versus contracting a third party for the services.

Baltimore Gas & Electric, taking a slightly different approach, wants to build and own a battery for distribution system reliability. The utility would bid it into PJM, primarily frequency regulation, when reliability is not constrained. At Chesapeake Beach, Ameresco will develop and own a battery to serve winter peaks, bidding into PJM on the side. Compensation there will work differently from the comparable Convergent project: “The PJM revenue will be under the vendor’s account and they would keep that revenue,” the filing says. “However, under a revenue-share construct, BGE would receive a [percentage] of PJM revenue above a certain annual threshold.”

These and the other utility proposals show that there are quite a few ways to divvy up battery revenue between utility and a third party, when a state specifically requests it.

Expand the universe

These seemingly arcane distinctions all amount to an effort to open up new business models for storage developers that, ideally, will cost less than standard grid upgrades today.

“When you enable multiple-use, you get more value out of a single storage project and lower the effective cost of providing that asset, and therefore on the margin will bring in a new set of projects,” Burwen said. “Multiple-use expands the universe of economically viable storage projects.”

A battery for rural reliability on its own often costs too much; a battery for the same purpose that also earns money for a third-party developer the rest of the year will cost less for the utility, and by extension, its customers.

The storage industry will be in an entirely different place when the pilot wraps up in a decade. If any of the models works particularly well, though, the utilities may opt to replicate it before then. Utilities in other states could too.