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Federal Energy Regulatory Commission’s Order 841 On Electric Storage: A Landmark Game- Changing Decision for Emerging Technologies in Organized Power Markets

March 27, 2018


By Jehmal Terrence Hudson, Esq.

Introduction

The electric power industry is going through a major transformation through advancements in technology and changing consumer preferences. New technologies can further optimize the electric grid by enabling greater balance of supply and demand. Consumers’ expectations are changing as they use new technologies to gain greater control over their electricity consumption and generation. Utilities, corporations, states, local entities, and other industry participants recognize the need to address and integrate new technologies to meet consumers’ demand and preferences. Energy technologies affecting electricity generation, transmission, and distribution include energy storage, microgrids, energy management systems, distributed generation, demand-side management, smart meters, smart appliances, and other intelligent grid technologies.

Wholesale markets involve the sale of electricity among electric utilities and electricity traders before it is eventually sold to consumers. Under the Federal Power Act (FPA), the Federal Energy Regulatory Commission (FERC or Commission) has jurisdiction over the wholesale markets. Wholesale electricity markets differ from retail markets; demand is determined at the retail level. Independent systems operators (ISOs) operate the transmission system independently of, and foster competition for electricity generation among, wholesale market participants. Numerous transmission owners formed ISOs. The Commission encouraged utilities to join regional transmission organizations (RTOs) which, like an ISO, would operate the transmission systems and develop innovative procedures to manage transmission equitably. Each ISO and RTO have energy and ancillary services markets that buyers and sellers bid for or offer generation.

Electric storage provides many benefits to the electric grid and to electricity consumers. Electricity storage systems can create a more resilient energy infrastructure and bring cost savings to utilities and consumers. If cost-competitive energy storage technologies are more widely used, other grid assets may no longer need to meet maximum power demands. Electricity energy time-shift is the storage of electric energy when its value and/or price is low; and use of the stored energy when the value and/or price is high, which typically occurs during peak demand. Electric storage also provides key ancillary services including reserves or back up power, momentary and hourly reconciliation of electrical supply and demand to stabilize the alternating current frequency at which the grid operates, and voltage support that is required to maintain the voltage of the electric grid.

Electric storage resources can provide many services to the organized wholesale electric markets and meet various technical requirements. However, the existing participation models that electric storage resources are eligible to use in the RTOs/ISOs impede electric storage resources from providing all their technically capable services. The barriers that arise because existing technical requirements for providing certain services are unsuitable for fast and controllable technologies such as electric storage resources. Market rules designed for traditional generation technologies or prevent new technologies from providing their technically capable services can adversely impact the competitiveness of the organized wholesale electric markets.

Background Regulatory History

The Commission wanted to remove barriers to resources that were technically capable of participating in the organized wholesale electric markets. In 2010, Commission Staff issued a Request for Comments Regarding Rates, Accounting and Financial Reporting for New Electric Storage Technologies related to alternatives for categorizing and compensating storage services and ideas on how best to develop rate policies that accommodate the flexibility of storage, consistent with the Federal Power Act. The Commission issued several rulemakings that helped alleviate some barriers to electric storage resource participation in organized wholesale electric markets. Moreover, the Commission addressed electric storage-related issues on a case-by-case basis.

As electric storage resources and distributed energy resources improved, and their costs declined, the Commission became concerned that these resources may face barriers that limit them from participating in organized wholesale electric markets. The Commission hosted a panel to discuss electric storage resources at the November 19, 2015 Commission meeting. On April 11, 2016, Commission Staff issued data requests to each of the six RTOs/ISOs, seeking information about the rules in the organized wholesale electric markets that affect electric storage resource participation. Commission Staff sought comments on whether barriers exist to the participation of electric storage resources in the organized wholesale electric markets that may lead to unjust and unreasonable wholesale rates.

Previously, the Commission allowed flexibility for each RTO/ISO to approach electric storage resource integration in its organized wholesale electric markets differently. RTOs/ISOs developed participation models before electric storage resources achieved their current technical capability and commercial viability, so some markets rely on these existing models for electric storage resource participation. The Commission examined that market rules designed for traditional generation resources created barriers to entry for emerging technologies. Accordingly, the Commission promulgated rules that recognize the operational characteristics of non-traditional resources such as variable energy resources and demand response. As electric storage resources cost declined, and their technical potential expanded, their resource ability to provide operational and economic benefits to the organized wholesale electric markets increased.

A tariff is a compilation of terms and conditions of service, rates and schedules, contracts and a copy of each form of service agreement, for an entity, as required by the various statutes and Commission regulation. Many tariffs were developed when traditional generation resources were the only resources participating in the organized wholesale electric markets. As new and innovative resources reached commercial maturity, RTOs/ISOs updated their tariffs to establish participation models for these resources and reviewed the technical requirements for each service or determined which service the new resource provided. If an RTO/ISO was not able to update its market rules before a new resource became commercially able to sell into the organized wholesale electric markets, the new resource may need to participate under one of the existing participation models developed for some other type of resource. This limited the market opportunities for new resources and limited the potential supply of some services.

Furthermore, new resources may have difficulty creating momentum for the market rule changes necessary to participate and may need to spend considerable time and effort to gain entry to the organized wholesale electric markets. Where rules designed for traditional generation resources were applied to new technologies, where new technologies were required to fit into existing participation models, and where participation models focused on resource eligibility to provide services more than the resource technical ability to provide services, barriers could emerge to new technology participation in the organized wholesale electric markets. Given the unique attributes of electric storage resources, establishing a participation model consisting of market rules that acknowledged their unique attributes enabled them to effectively participate in the organized wholesale electric markets. This participation model could adapt existing market rules to incorporate the reforms proposed below and/or create a new set of rules to accommodate the participation of electric storage resources, depending on the existing market construct in each RTO/ISO.

The RTOs/ISOs engaged different approaches to integrating electric storage resources into their organized wholesale electric markets. While electric storage resources were already providing energy and ancillary services in some organized wholesale electric markets, these resources used existing participation models designed for traditional generation or load resources that do not recognize electric storage resources’ unique physical and operational characteristics. Some organized wholesale electric markets defined participation models in their tariffs for electric storage resources, but those models limited the services that electric storage resources may provide.

Requiring electric storage resources to use participation models designed for a different resource may fail to recognize electric storage resources’ physical and operational characteristics and their capability to provide energy, capacity and ancillary services in the organized wholesale electric markets. Current tariffs that do not recognize electric storage resource operational characteristics serve to limit electric storage resource participation in the organized wholesale electric markets and resulted in inefficient resource use. Consequently, electric storage resources do not get dispatched efficiently, thereby impacting market outcome competitiveness.

Limiting the services an electric storage resource that is eligible to provide and limiting the efficiency in which it is dispatched to provide services may also inhibit developers’ incentives to design their electric storage resources to provide all capacity, energy and ancillary services. This further reduces competition for providing those services in the organized wholesale electric markets. Effective electric storage resource integration into the organized wholesale electric markets would enhance competition and help to ensure that these markets produce just and reasonable rates.

Final Rule

Commission Decision

On February 15, 2018, the Commission voted to remove barriers to electric storage resource participation in the capacity, energy and ancillary services markets operated by Regional Transmission Organizations and Independent System Operators. The final rule enhanced competition and promoted greater efficiency in the nation’s electric wholesale markets and support resilience. The final rule was published in the Federal Register on March 8 and compliance filings by the RTOs and ISOs are due 270 days after the effective date, with an additional 365 days to implement the tariff revisions. 

Electric Storage Definition

Foremost, the final rule defined an electric storage resource as a resource capable of receiving electric energy from the grid and storing it for later injection of electric energy back to the grid. The Commission clarified that this definition covered electric storage resources capable of receiving electric energy from the grid and storing it for later injection of electric energy back to the grid, regardless of their storage medium.  Additionally, consistent with the Notice of Proposed Rulemaking proposal, the Commission clarified that electric storage resources located on the interstate transmission system, on a distribution system, or behind the meter fall under this definition. By including all electric storage technologies, and by allowing resources that are interconnected to the transmission system, distribution system, or behind the meter to use the participation model for electric storage resources, the Commission made certain that the market rules are for all electric storage technology.

Participation Models for Electric Storage Resources

In the final rule, the Commission required each RTO and ISO to revise its tariff to establish a participation model consisting market rules that, recognizing the physical and operational characteristics of electric storage resources, facilitates their participation in the RTO/ISO markets. The participation model must:

(1) ensure that a resource using the participation model is eligible to provide all capacity, energy, and ancillary services that the resource is technically capable of providing in the RTO/ISO markets;

(2) ensure that a resource using the participation model can be dispatched and can set the wholesale market clearing price as both a wholesale seller and wholesale buyer consistent with existing market rules that govern when a resource can set the wholesale price;

(3) account for the physical and operational characteristics of electric storage resources through bidding parameters or other means; and

(4) establish a minimum size requirement for participation in the RTO/ISO markets that does not exceed 100 kW.

The Commission found that requiring each RTO/ISO to create a participation model that recognizes the unique characteristics of electric storage resources would help eliminate barriers to their participation in the RTO/ISO markets, which would enhance competition and help ensure that these markets produced just and reasonable rates. However, the final rule required each RTO/ISO to implement market rules applicable to electric storage resources that voluntarily sought to participate in the RTO/ISO markets and not require electric storage resources to participate in those markets.  

Additionally, the Commission found that the final rule did not preclude an RTO/ISO from structuring its markets based on the technical requirements that a resource must meet to provide needed services.  It required each RTO/ISO establish a participation model that ensured eligibility to participate in the RTO/ISO markets that recognized electric storage resource physical and operational characteristics. The final rule did not grant undue preference to electric storage resources as a group or to specific electric storage technologies. It removed barriers to their participation, enhancing competition among all resources that were technically capable of providing wholesale services. Resources that use the participation model required by this final rule must fulfill certain responsibilities set forth in the FPA and the Commission’s rules and regulations. Moreover, resources that use this participation model will be compensated for the wholesale services they provide in the same manner as other resources that provide these services.

Challenges to the Final Rule

On March 19, 2018, several market participants, including one regional grid operator, filed for rehearing on the proposal. They argued the order overstepped FERC’s jurisdiction by mandating that energy storage resources on the distribution system be able to participate in wholesale markets. Particularly, allowing distribution-connected storage to provide both retail and wholesale services overstepped the limits on the Commission’s jurisdiction under the Federal Power Act by interfering in state jurisdiction over retail sales and affecting the ability to preserve distribution system reliability. Furthermore, they argued FERC should require distributed storage resources to make a binding choice to participate exclusively either in the wholesale markets or at the retail level. The market participants also sought rehearing because FERC did not acknowledge or provide a reason for rejecting recommendations for an opt-out provision to storage rules. If FERC rejects the rehearing requests, it could potentially set up a challenge at the U.S. Court of Appeals for the District of Columbia Circuit Court. 

Conclusion

The FERC final rule may be a landmark decision for the energy storage industry. Creating a robust participation model for electric storage resources helps remove barriers to electric storage resource participation in the organized wholesale electric markets and ensure that electric storage resources provides the services that they were technically capable of providing. But many argue the FERC final rule did not compel grid operators to change technical requirements or compensation mechanisms for existing products, introduce new products, or exempt energy storage resources from performance requirements. Nevertheless, many questions remain in the market, including whether electricity storage costs will continue to decline, and can storage reduce the inefficiencies of cycling traditional generating plants.

Likewise, many argue the FERC final rule did not address state or retail level challenges or reduce barriers that would allow for energy storage to capture distribution level or customer benefits. That accentuates the important role state participation would play in developing electricity storage. Unifying the FERC policy with state-level initiatives that enabled storage to capture all available value streams would likely increase its market potential compared to a future that limits storage to capturing only wholesale market benefits.

Jehmal Terrence Hudson is an attorney working in government affairs at the Federal Energy Regulatory Commission. The views expressed in this article are solely those of the author and do not necessarily reflect the views of FERC or the U.S. government.

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