Stephen Lacey: What happens when the most important market signal for energy storage gets stripped away virtually overnight? That's what happened in the U.S. this year when the regional transmission operator PJM put in place new rules for storage as a provider of frequency regulation. Between 2011 and 2015 hundreds of megawatts of storage were put in place to balance the grid in PJM territory. A strong market signal made it extremely easy to develop projects, and it caused an explosion of growth.
We are in a different world today. Those heady days are over and storage developers are looking to other markets and other types of grid services to make money. Our senior storage analyst Dan Finn-Foley has been tracking the regulation of frequency regulation in PJM and other markets. We dove deep this week on what it means for storage developers and future tweaks to market design. We started with a brief description of frequency regulation itself.
Dan Finn-Foley: Essentially what you're looking at is short-term and long-term deviations between supply and demand. You might have a bunch of wind turbines coming online because the wind picks up, that increases your supply, a bunch of people may come home, turn on their air conditioners at the same time, that increases your demand. That mismatch that's created between supply and demand can affect the frequency on the grid. Generators don't like it when the frequency on the grid is deviating, so sometimes they'll even turn themselves off, which can create blackouts, whole lot of problems that can be created.
Ancillary services, frequency regulation, spinning reserves, non-spinning reserves, called a lot of different things, are designed to sync up the differences between supply and demand and really just ensure that the grid functions correctly without any outages. If wind picks up and the wind turbines speed up, the light in your office doesn't get brighter. This is the way that it sort of manages all those little things.
Stephen Lacey: 2011 was a turning point for the energy storage market because of new rules created in PJM, the East Coast and Mid-Atlantic grid. Explain those rule changes and what they did for storage.
Dan Finn-Foley: Yeah, of course. This really was the first big opportunity for energy storage, the first market based system where they could participate at scale. Essentially frequency regulation had existed for a while, but it was all pretty large systems, natural gas turbines that maybe have 100 megawatts capacity operating at 70 megawatts so they can increase their output, decrease their output. Those things take time. It takes time to spin any sort of thermal sort of generation up. It takes time to manage frequency in that respect, so they developed a new signal, a dynamic regulation signal, which was designed specifically to take advantage of battery energy storage, flywheel energy storage, systems that can respond in less than a second of time as opposed to 10 minutes or things like that.
When they designed this system, PJM, they designed this new signal, it was put in place specifically for advanced energy storage, short duration systems usually 15, 20 minutes, maybe 30 minute systems, to take advantage of that unique operational characteristic and make as good use of it as possible. When that new system got designed, they implemented performance based systems after the FERC order to that effect, and that essentially meant that if your system is performing better they say, "Hey, we need energy and you provide energy," you're more likely to be called upon in the future and the revenue that you get is a function of that as well. That really opened up the market. Energy storage had a market that specifically addressed the unique operational characteristics of energy storage, and that's where that opportunity really took off.
Stephen Lacey: And it caused a bonanza in relative terms to the energy storage market. It represented hundreds and hundreds of megawatts of storage deployment, and you could build a storage plant prettily easily in PJM at one point.
Dan Finn-Foley: Yeah, with the clearing prices as high as they were in 2013, 2014, the return on investment was really short. I was hearing things as short as a couple of years to make your money back. The prices were clearing very high because natural gas prices were high as well. There was a real gold rush into the PJM market in 2012, 2013, 2014. You see a lot of deployments coming online into 2015 as well, and at that point they reached saturation in the dynamic regulation market. There's only so much dynamic regulation that you want as opposed to then longer duration regulation A signals. Once that sort of peaked out and the sooner became saturated some problems started appearing.
Stephen Lacey: That brings us to the real changes which took effect at the beginning of this year.
Dan Finn-Foley: That's right.
Stephen Lacey: And it has caused a serious slowdown in the market. It's a number of rule changes. What are they, and why has it caused the storage market to basically collapse in PJM?
Dan Finn-Foley: It is, it is a number of different changes, and we've seen that collapse in real time as we've been tracking deployments. There's an interconnection queue for PJM of course as there is in any ISO and we're seeing projects drop off that queue as supposed to being added to it. Developers, owners are not really looking at this market as favorably. There are a lot of different changes coming into play that are affecting this. The first and probably the biggest one is not an actual design issue, but it's a price issue. Clearing prices have dropped dramatically from highest in 2014 so much from maybe $43 to let's say $15.
Stephen Lacey: Why?
Dan Finn-Foley: That's almost directly correlated to natural gas prices. You can pretty much draw a dotted line between clearing prices for ancillary services markets and natural gas prices. As they have been dropping in the PJM territory, the clearing prices have dropped as well. The single changes are affecting the market in a different way that's equally significant. One of the biggest changes is that the signal is no longer energy neutral, and that's a really big deal for energy storage.
When you're talking about natural gas plants or wind turbines, things like that, they're not energy limited. They can generate energy as long as you want them to or as long as in the case of wind turbine wind is available. With energy storage you have a fixed duration that you're able to inject power into the gird. If you have a 15 minute battery, after 15 minutes you're out of juice. You don't have any more energy to inject into the grid. A lot of systems went online in PJM that were 15 minute, 20 minute systems. So they would expect after that time for the signal to converge back so that after they've discharged for a while they could spend some time recharging, and the signal did that.
There's a side effect of this where an energy resource would be dispatched. They would say, "Hey, we need more energy in the gird. Dispatch all of your stored energy now," and then after 15 minutes the energy storage resource would be out and so they'd have to start recharging. In that case they'd actually be working against the error that they're trying to correct. So at that point the system operator would have to step in and actually manually dictate what was going on with that resource. That was a pretty bad situation, and that was due to that energy neutrality component. They've pretty much axed that. They call it conditionally neutral which really just means we'll make it neutral if we can, but no promises on that.
Stephen Lacey: It's basically a recognition that storage is a unique technology and it needs its own classification and it needs to be penalized if it can't provide the same services as say a natural gas plant?
Dan Finn-Foley: Exactly. I would say that the original signal recognized that, the operational characteristic. The new signal understands that but says, "Listen, we can't go out of our way to recharge you if the system is undergoing an event that moves in the other direction." Now they're saying, "Well, we will direct resources to recharge you if we can. But if we can't, we still expect you to provide energy. If you can't provide energy, that's your problem at this point now."
Stephen Lacey: Then that lowers your performance score?
Dan Finn-Foley: Exactly, yes.
Stephen Lacey: And what does that do?
Dan Finn-Foley: The performance score does a couple of things, there's a real domino effect here. The performance score drops means that your revenue drops because it is performance based revenue. Originally regulation D resources had 95 percent, in the high 90s performance scores. Now you can actually look at these market reports and they're dropping down into the 80s, into the 70s, much closer to what the regulation A performance scores are. Because of that your revenue drops. In addition, the performance scores indicate where you're coming online in merit order. When you get dispatched to actually provide the service they are in the market to do. If your performance score drops, you may not be called up when there's an event, which means that you're not participating in the market. It's really a double whammy in this case for it to be not energy neutral.
Stephen Lacey: Another big change is moving from the 15 minute signal to the 30 minute signal.
Dan Finn-Foley: Yeah, that's not so much a problem for new energy storage resources. If you're building in the market now, you have an expectation to have this 30 minute signal. The problem comes if you were a resource that built during the boom period when lithium-ion batteries were sort of assumed to have a four-to-one ratio, which would be about a 15 minute duration. That's the ratio between power and energy, as good as a measure of what fraction of an hour you're able to discharge energy in.
Stephen Lacey: So you need to build a much bigger capacity battery then?
Dan Finn-Foley: Yeah, exactly.
Stephen Lacey: So rising your cost. Or if you have an existing project, then you need to significantly lower your power capacity, right?
Dan Finn-Foley: Exactly, you have to derate. The way I try to describe it is if you have a rectangle, the energy is the amount of the area of the rectangle. One axis is the power of your system. The other axis is the duration. Then you multiply those two together and you get the energy. If you have to extend the duration, then you have to pull back the power portion in order to keep the area the same because your battery isn't getting any bigger. If you have a 10 megawatt system, you may have to derate that to a five megawatt system. Because your revenue is based on how much power you inject, that cuts your revenue in half right there.
Stephen Lacey: Are storage owners screwed in PJM right now because of these changes? It's a pretty big deal.
Dan Finn-Foley: The short answer would be yes. A lot of these systems I think got in early enough that they were able to get a significant amount of revenue out when it was 2014, during these really great boom periods. But right now I think that a lot of developers and owners are scrambling to figure out how to make these systems cost effective right now. I mean you're not just talking about double digit percentage decreases in revenue. It can be as much as 70, 80 percent when you stack all of these factors on top of each other, including the clearing prices.
I don't see many people looking into the market as an opportunity right now, and if I were a developer looking at other frequency regulation markets across the country, I'd look at this as a big signpost and say, "This opportunity, you can have the rug pulled out from under you really quickly," and that would make me very nervous.
Stephen Lacey: I think that brings us to the broader context of why we're having this conversation in the first place, and that is how quickly the rules can change. How much of a cautionary tale is this for developers as they look to other regional markets around the country that are starting to integrate energy storage into frequency regulation for example?
Dan Finn-Foley: I think it should be a pretty significant cautionary tale. When you go into a market assuming a certain set of rules are going to be the norm and then they're changed very quickly and your system's return on investment changes that dramatically and it can even cause your system to be operating in a way that might degrade the battery, then you're looking at significantly altered economics. You have to start baking in that assumption that something may change significantly before going into any of these markets.
Stephen Lacey: Do you see developers baking in those assumptions as they go into say ERCOT or MISO or in California?
Dan Finn-Foley: Yeah, absolutely, and I think that there's an optimism there as well. PJM was the first market that had a signal designed just for energy storage. We see developers putting projects in design to serve ancillary services in a variety of different markets. There's one in Maine serving ISO New England. We have a couple in Texas that are going online to serve the ancillary services market there.
That shows that developers see this as an opportunity. They're starting to dip their toes in these markets, maybe learn a little bit about how they function, what the opportunity is. There's already friction in that case. There's a battery system operating in the mid-continent ISO in Indiana Power & Light, which is not really operating right now. There's this disconnect between what the expectation is for the battery system and the ISO rules of engagement there that have elevated this to a complaint at FERC.
That's really where everything is dovetailing together. It's all coming into FERC at this point. The industry really needs FERC to step in and provide some clarity. That's going to be the next big step. PJM did that. They came in and provided some clarity, but then they took it all away.
Stephen Lacey: Then they muddied the water.
Dan Finn-Foley: Exactly, yeah, they cleared the waters and muddied them very quickly. FERC needs to come in and they've already started this process.
Stephen Lacey: Last November FERC issued a notice of proposed rule making, these acronyms get a little too much, an NOPR, and that notice basically said we should start a process to create a set of rules for regional electricity markets to integrate storage, to provide those markets signals that storage can easily provide ancillary services.
Dan Finn-Foley: Exactly. It suggested a lot of really important steps. Two of the biggest ones would be that energy surge had to be eligible, which in many ISOs right now it is not or is at least not explicitly eligible. But if you're planning a 20-year system, do you want implicit eligibility or explicit eligibility? There's a big difference there. The second one is that all of these different markets have to recognize, I believe the specific terms they use is the unique operational characteristics, so that means things like energy neutrality I think falls under that umbrella.
The PJM signal in this case would then not mesh with the way that FERC I feel defines this, and I say I feel because there is again sort of muddied water there. There were a lot of comments to this NOPR and all of the ISOs pretty much said, "Oh yeah. We're pretty much there. Or we're almost there. We've got a couple working groups in progress and then we'll be all set." The industry responded and said, "You're really not close to being there. We need certainty to come into place and change this."
If the FERC NOPR moves forward I think you're going to see these markets really move towards a much friendlier environment for energy storage. It could be a huge opportunity talking in gigawatts scale.
Stephen Lacey: People often talk about revenue stacking. Now that batteries are becoming more economic, you can use them in a ton of different ways. What are the other market signals and applications that are being developed for storage that you think are meaningful that could fill in the gap if say something like frequency regulations goes away or that can be added to a revenue stream like frequency regulation?
Dan Finn-Foley: How much time does the podcast ... I mean that's a can of worms, the value stacking idea is ... I speak to people who are of two minds of it. On one side I talk to people who say energy storage right now is in a position where you don't even have to worry about being a Swiss Army knife. You can just be a corkscrew. You can provide capacity and you're done. Costs are low enough that you can provide one service and be fine.
Then I talked to other people who say if you're in the right market you can be providing all of these things at once, and so long as your control system and the market signals are in place you can be providing backup power while providing ancillary services and bidding into the capacity market, you can be doing everything for everyone all at once, and that's really exciting too.
When you talk about value stacking, one of the problems which ties again back to FERC, everything dovetails through FERC like I was saying, there isn't a really clear mechanism to value sack in wholesale markets. In several ancillary services markets if you provide frequency regulation you cannot then provide other services. You're disqualified from doing so. That becomes a really big problem if you're relying on multiple value streams to do that.
FERC put out this, I believe, I think it was a policy statement which I loved which basically just said we're open to the idea of doing multiple things at once, of getting market based rates, say frequency regulation, and then cost based recovery, say you're providing distribution deferral for utility and they're paying you a flat amount for that. They basically said, "Yes, we've weighted in on these two specific items on this, but we're willing to talk about it further. This shouldn't be taken as a precedent."
That's I think the next frontier for energy storage. If the FERC NOPR moves forward and says, "You're eligible," now what are you eligible for? You're eligible to do this. But can you also do A, B, C, and D all together? That's the next big step.
Stephen Lacey: Are we years away from that?
Dan Finn-Foley: I think so. The first problem is even if the FERC NOPR moves forward if the ISOs go about examining multiple value streams at the same time they're reforming their market design, then energy storage is in a good place. If you then have to layer it on top of that existing process, then you're looking at a much longer timeframe.
Stephen Lacey: What's the likelihood that we start to see renewables and storage or say like a hybrid gas storage plant start to fill in for closing nuclear and coal plants?
Dan Finn-Foley: That's an interesting question. Talking about baseload makes things much more complicated. Baseload if you're looking at something that's operating for 24 hours, then you need to be providing firm capacity. To do that would require either a resource that's pretty steady already or a really large amount of energy storage, because the larger system that we have in place now are 5-hour systems. There are some much longer. I'm taking things to talk mostly about batteries and flywheels and not compressed air as much or pumped hydro.
Stephen Lacey: And with batteries I mean 5 to 8 hours is considered long-duration storage.
Dan Finn-Foley: Absolutely.
Stephen Lacey: I mean, it's not long duration in the baseload sense.
Dan Finn-Foley: Exactly. If you have, let's say you're trying to firm a wind turbine, just talking about a single wind turbine or a farm and there are a couple of days where there isn't much wind, then in order to provide firm base load power you would need 48 hours of energy storage resources to discharge. That means you'd have to charge that resource for a long amount of time to get that much energy and you'd have to ... What happens if you have a 72 hour situation? It's hard to plan that far ahead with intermittent resources.
Stephen Lacey: What are some of the other applications that are interesting to you? We saw in the U.S. in California in the Imperial Irrigation District the first application of energy storage for black start, black start services. That's kind of an interesting application.
Dan Finn-Foley: Yeah, that's a really exciting one. I mean that's a big system, 30 megawatts to restart the entire grid. That's something that energy storage can do really well. In terms of how cost effective that is is a good question. Sometimes a simple diesel system is enough to get the thing up and running, but batteries can do it quickly and now it's proven cost effectively. Now that we have a proof of concept I think that utilities as they plan these systems out are going to look at that more and more.
Stephen Lacey: I sat down with a bunch of folks from GE who were briefing me on this storage gas hybrid platform and they were all just talking about market design. They were interested in talking about the technology, but they wanted to talk about the market rules and regulation. There are all these really interesting applications we can talk about, but when it comes down to it, it's all about the market signals themselves, which are still relatively immature and can change pretty quickly as the PJM story taught us.
Dan Finn-Foley: Absolutely. They need that certainty. If you have explicit operational certainty about what you're bidding into and what the mechanisms are then you're set. But even in the systems [that exist] now, that hybrid system is exciting, because you're taking a system that responds on the order of minutes and now it can respond on the order of seconds. That takes you up to a different ball game. You're going from non-spinning reserve to spinning reserve or spinning reserve to now you can provide frequency regulation without needing to burn natural gas.
But it is a market signal problem, and the way that you can tell that is that they're called spinning reserves, they were designed thinking about conventional generations, turbines that are literally spinning. If your lithium-ion battery is spinning you have a contractor problem that you have to figure out. So can you really have confidence that a market signal is designed for you if it's called something that no longer technically applies to the resource that you're installing?
Stephen Lacey: So we need a whole new set of [terms and] language?
Dan Finn-Foley: Yeah, we need a charged reserve, something like that. Of course there are systems that call them primary reserve or supplemental reserve, things like that. It's a signpost that energy storage, short duration energy storage really wasn't considered when these systems were designed, and that's the problem that was identified in that FERC NOPR, and when that moves forward we're going to see energy storage really explode across these markets.
Stephen Lacey: Daniel Finn-Foley is a senior storage analyst at GTM Research and he's keeping his eyes on the development of markets for us here in the US and abroad. Thanks Dan.
Dan Finn-Foley: Thanks so much Stephen.