An Overview of Energy Storage Laws and Policies in the US

Introduction

The Federal Energy Regulatory Commission (FERC) defines energy storage as “a resource capable of receiving electric energy from the grid and storing it for later injection of electric energy back to the grid.”[1] With the proliferation of renewable energy resources, mainly wind and solar, in the electrical grid over the past ten years, energy storage has been called the “holy grail” for being able to mitigate the effects of intermittent renewable energy.[2] However, energy storage still faces significant challenges to reaching its full potential and these challenges are exacerbated as the time frame to reach widespread commercial use becomes increasingly tighter with states pushing the goal of a carbon free electricity grid.[3] This paper will explain the benefits of energy storage and how regulation and policy at the state and federal level can help guarantee a smoother transition towards a future with renewable energy.

Battery Storage

Battery energy storage systems are rechargeable batteries that store generated energy either from a generation source or the grid itself. They are “reversible” as resources to the grid, meaning that they can both dispatch and store energy, in bulk. Battery energy storage systems have many beneficial uses in different aspects of the electrical grid including the ability to replace peaking gas turbines, defer transmission and distribution upgrades, reduce curtailment, and provide grid support through ancillary services. These benefits will only be intensified as renewable energy penetration increases rapidly and the benefits are realized at all three phases of the electrical grid: generation, transmission, and distribution, and explained below.

Generation Level

At the generation level, battery storage would primarily be used to replace gas peaking power plants despite having very different operating characteristics than gas peaking plants – gas turbines can run continuously (so long as there is an adequate fuel supply), whereas batteries must be recharged for a certain number of hours following discharge.[4] There is also a fundamental difference in their purpose: battery storage will be used to flatten the “ramp up period” of duck curve shown below in Figure 1, while gas peaking plants are used as a result of the situation. Battery storage has already begun replacing gas peaking plants in California. California initially turned to natural gas-fired peaking plants to address the ramping up period required to meet the peak load demands, as shown in Figure 1.[5] It remained California’s approach until one of the worst natural gas leaks in U.S. history occurred in 2015 in Aliso Canyon.[6] California Public Utilities Commission’s response was to create the industry’s first major test case for utility-scale energy storage by fast-tracking the approval of 104.5 MW of battery based energy storage systems within the jurisdiction of Aliso Canyon as well as in San Diego.[7] Battery storage will have the opportunity to further replace an expected 13 GW of peaking capacity in California that will be retired over the next 20 years.[8] This number could reasonably be higher because it is based solely on age and does not take into effect retirements of other generation capacity outside the state that can be used to meet peak demand in California.[9]

Figure 1

Battery storage has multiple advantages over natural gas peaking plants, the first of which is size. Where natural gas uses 12 acres per megawatt of electricity generated, energy storage is roughly 1 acre per megawatt.[10] This allows for battery storage facilities to be built on the site of renewable energy generation, on or near substations for transmission lines, as well as closer to city centers to assist with the distribution level of the grid. The second advantage is that battery storage can be built in a matter of months. In just six months of planning and building, 20 MW of battery-based energy storage was deployed at a substation in southern California following the 2015 natural gas leak,[11] whereas gas-fired plants typically take 28-30 months to build.[12]

Transmission Level

Renewable energy economics and therefore renewable energy penetration, are somewhat reliant on high voltage transmission lines to get generated electricity into high load areas. The benefits of battery storage with regard to transmission are threefold. First, battery storage can be used to provide transmission congestion relief in certain areas of the transmission system that become overloaded during times of higher demand.[13] In this scenario, battery storage is most beneficial when placed closer to the load center, downstream from the bottlenecked transmission, so that energy would be discharged prior to the congestion occurring.[14] Conversely, battery storage can be placed upstream at the generation resource and used as part of an arbitrage of power prices. Energy that would otherwise be curtailed due to overgeneration (or sold at a low price), can be stored and then sold when demand is higher, and the price of the power is higher.[15] The second benefit at the transmission level is transmission upgrade deferral. Battery storage can help reduce the need, size, and the urgency of new investment in the transmission systems by installing a small amount of battery storage downstream near the load center.[16] As the transmission lines reach their full capacity during peak loads, battery storage would reduce the load so as to avoid the transmission lines operating at full capacity on a consistent basis, which would delay the need for upgraded or replaced lines because of the reduced strain.[17] Using battery storage to shift demand to less congested times also prevents overloading lines, thus saving ratepayers the additional costs of new transmission lines.[18] Last, battery storage can assist with the reliability and system performance of the transmission lines by maintaining system voltage and providing additional capacity during system faults.[19]

Customer Level

While this paper is generally focused on utility-scale battery storage development, residential “behind the meter” battery storage has the ability to provide benefit to the grid through reducing the customers demand at peak times. Similar to demand-side management, which encourages customers to reduce their overall demand through energy efficiency, technological solutions, and financial incentives,[20] battery storage at a residential level can help mitigate peak demand significantly on an aggregated basis if deployed in a significant amount of homes.[21] Financial incentives such as time-of-use programs and energy arbitrage incentivize customers to store energy from non-peak hours, and then dispatch that electricity back to the grid during peak hours. Also, when residential battery storage is paired with residential solar panels or other distributed energy resources, any additional energy generated during the day or non-peak hours can then be stored and used during peak hours.[22]

Regulation and Policies Governing Energy Storage

Just as there was (and continues to be) disagreements over residential net metering and how to accurately value distributed generation resources’ benefit to the grid,[23] energy storage has a similar problem. It has been difficult to properly value energy storage’s benefit to the grid using the standard comparative metrics such as levelized cost of energy because there are multiple benefits provided to the grid and the benefits transcend standard grid classification of resources (generation, transmission, and distribution).[24] The first step towards properly valuing energy storage, is creating appropriate regulations that recognize and classify the benefits of battery storage because it will allow for greater transparency for developers and lenders alike to understand guaranteed revenue streams. These regulations and definitions will likely depart from the traditional form of classification and valuation due to the flexibility of battery storage. Inadequate regulations and policies can lead to battery storage systems not receiving adequate compensation for the vast services they supply, thus deterring significant investment opportunities that were available to renewable energy resources.

Regulations Governing Battery storage

The first key challenge to the widespread development of battery storage is that there is no universally accepted definition or classification within the traditional categories of utility regulation. The key issue is that the flexibility and multiple uses of battery storage means that it cannot be reduced to either generation or transmission. Instead, battery storage is generation, transmission, load, and demand response because it dispatches and transports electricity, withdraws from the grid, and mitigates the demand on the grid.[25] A particular classification of battery storage could also determine which regulatory body maintains jurisdiction over it. The Federal Energy Regulatory Commission maintains jurisdiction over battery storage when it is considered either transmission of electricity in interstate commerce, the sale of electricity at wholesale in interstate commerce, or distinguished as “sale for resale” such as energy arbitrage.[26] Conversely, battery storage is subject to state regulation when it is considered a generation resource.[27] FERC has also assumed exclusive jurisdiction over distribution level battery storage at the distribution level because it may involve the buying and selling of electricity at wholesale and retail level.[28]

A recent Texas case in front of the Public Utility Commission of Texas (PUCT) provides a good example of the challenges in classify battery storage as well as the implications of their ruling. The PUCT considered a battery installation as transmission for the portion of the battery that provided reactive power (voltage control), but determined the battery’s back-up services for power on the grid as a distribution asset.[29] The PUCT acknowledged that classification of a battery storage system depends on the services it provides,[30] but also was the prime example of the arguments toward classifying battery storage as a generation or transmission asset.[31] The PUCT ruled that “even though the battery does produce real power when it is discharged” batteries do not remain charged and provide reliability services rather than power for commercial sales,” as typical generation assets do.[32] However, this fails to address one of the underlying issues of battery storage in the fact by storing the electricity, the battery storage is simply time-shifting the generation asset. The failure to recognize this additional benefit means that battery storage developers and investors will have one less revenue stream for their project because they will not be adequately compensated for providing a benefit to the grid.

Policies Governing Energy Storage

Federal tax credits for wind and solar energy have been predominant financial incentives for renewable energy development in the U.S. The investment tax credit (ITC) was first created in 2005 and allows for 30% of a project’s costs to be deducted from the owner’s federal taxes, along with a five-year accelerated depreciation schedule (MACRS).[33] Accelerated depreciation encourages investment because it reduces tax liability and accelerates return by allowing businesses to deduct the depreciable basis of a project over five years.[34] The production tax credit (PTC) was first enacted in 1992 and provides an inflation-adjusted tax credit based on the electricity generated by a qualified project.[35] The PTC has generally been utilized by wind energy projects because wind has a higher capacity factor, meaning more PTCs will be generated in relation to the initial capital costs.[36] Solar energy is not eligible for PTCs and therefore uses the ITC almost exclusively. In both cases, tax equity investors play a key role in renewable energy development by financing the majority of the projects’ capital costs.[37] Through highly specific financing structures and company organization, the tax equity investors can receive the tax benefits and accelerated depreciation because most individual development companies do not have the tax liability to fully realize the tax benefits.[38] The expirations for both federal tax credits, particularly the PTC have been extended multiple times by Congress and the importance of the credit is evident by the installed capacity in the U.S. in relation to the extensions (See Figure 2).[39] As written now, the ITC is set to step down from 30 percent credit to 26 for 2020 projects, 22 percent for projects that begin in 2021, and will drop to a permanent ten percent for commercial and utility solar projects.[40] The PTC amount is set to be reduced by 20% for projects that begun in 2017, increasing by 20% each year until 2020 when it expires completely.

Figure 2

Both federal credits were instrumental in creating the market for renewable energy, which allowed for greater R&D and manufacturing advances to be made, thus guaranteeing the success of renewables beyond the tax credits.

Currently, the ITC and accelerated depreciation (MACRS) are the only federal tax incentives available to energy storage.[41] MACRS applies to all cases where an energy storage system is owned by a private party, however the schedule of depreciation can vary.[42] The full 30% ITC only applies to energy storage systems that are charged 100% by a connected solar PV system on site, and a portion of the ITC applies when then battery is charged by between 75% and 99% by an on-site solar PV system.[43] By requiring a battery storage system to be connected through proximity and ownership to a solar PV system, only one benefit of battery storage is realized and incentivized, thus not maximizing the full potential of returns for efficient development.

Moving Forward

In July 2018, the House Energy and Commerce Committee convened a hearing to give industry stakeholders a chance to present and clarify what they believe model federal storage policy is, as no federal storage policy currently exists beyond FERC Order 841.[44] The key discussions were regarding federal funding for research and development, an ITC specifically designed for battery storage, and ensuring that battery storage is considered and utilized in state planning and procurement analysis.

Federal Funding for R&D

Despite the Trump administration’s plans to make major budget cuts in fiscal year 2019 to the U.S. Department of Energy’s Office of Energy Efficiency and Renewable Energy (EERE),[45] Congress cleared a spending bill for fiscal year 2018 that included budgetary increases to EERE (which funds the majority of NREL) and the Advanced Research Projects Agency-Energy (ARPA-E).[46] ARPA-E is currently working on technologies for battery storage that can store energy for at least four hours of continuous operation, which would provide significant benefits to the grid.[47] While the current disposition of Congress and recent passing of the most recent spending bill suggest that there will not be major budget cuts in FY2019, there still is the chance that the Trump administration will slash funding towards that includes research and development for long term battery storage. Lack of funding will interrupt essential work on longer duration energy storage that is moving towards commercialization, as well as cut jobs, and lower morale amongst scientists performing the research.[48]

Energy Storage Specific ITC

In November 2018, a coalition of groups led by the Energy Storage Association wrote letters to Congress to request clarification that the ITC includes energy storage as an eligible technology.[49] The letter states the “bipartisan, bicameral support for this… which would ensure a level playing field for energy storage to compete with all other energy resources made eligible for the ITC.”[50] Both bills amend the Internal Revenue Code to allow tax credits for energy storage and battery storage technologies.[51] However, both bills were introduced back in 2017 and have not gained any traction beyond introduction and referral to various committees so it is unlikely that they will gain further traction.

Consideration in Planning and Procurement

In the majority of states, public utilities are required to filed an integrated resource plan (IRP) with their respective state public utility commission (PUC).[52] IRPs are the utilities’ planning process to meet the demand through new investment for supply, demand side management programs including rate plans such as time-of-use, and general rate cases.[53] Generally, FERC regulates wholesale power transactions, generation to a limited degree, and interstate transmission and power sales.[54] Further, FERC’s jurisdiction extends only to those matters which are not subject to regulation by the states.[55] In this case, it is very unlikely that Congress would involve itself in this granular level of localized issues, however they still could request FERC to prioritize an issue that is clearly meant for states’ rights.[56] However, similar to states’ initiative in developing renewable energy portfolio standards, some states have begun to require analysis of energy storage in the utility planning and procurement process before decisions are made to invest in new generation, transmission or distribution.[57]

submitted by: Kevin Watson, Cleantech Law Partners Energy Lawyer

[1] Order No. 841, Electric Storage Participation in Markets Operated by Regional Transmission Organizations and Independent System Operators, 162 FERC ¶ 61,127, 83 Fed. Reg. 9,580 (2018) (to be codified at 18 C.F.R. Part 35)

[2]

[3] Find an article that lists CA, CO, MA, etc

[4] https://www.nrel.gov/docs/fy18osti/70905.pdf at 1

[5] https://www.asme.org/engineering-topics/articles/energy/energy-storage-smooths-duck-curve Need to find better source, probably a CAISO

[6] See socal leak in 2015

[7] Insert docket number for AES/Tesla. https://spectrum.ieee.org/energywise/energy/the-smarter-grid/california-crisis-tests-energy-storage-supply-chain

[8] Id. at 3-4.

[9] Id. at 4.

[10] https://arstechnica.com/information-technology/2017/01/a-look-at-the-new-battery-storage-facility-in-california-built-with-tesla-powerpacks/ (1.5 acres used for a 20 MW battery storage facility)

[11] https://arstechnica.com/information-technology/2017/01/a-look-at-the-new-battery-storage-facility-in-california-built-with-tesla-powerpacks/

[12] https://www.powermag.com/controlling-schedule-quality-and-costs-for-new-gas-fired-plants/?printmode=1

[13] https://www.energy.gov/sites/prod/files/2013/08/f2/ElecStorageHndbk2013.pdf at 17.

[14] Id.

[15] https://www.energy.gov/sites/prod/files/2013/08/f2/ElecStorageHndbk2013.pdf at 2.

[16] https://prod-ng.sandia.gov/techlib-noauth/access-control.cgi/2015/151002.pdf at 16.

[17] Id.

[18] Managing the future at FN 52.

[19] Id. at 53.

[20] https://www.iea.org/tcp/end-use-electricity/dsm/

[21] Similar to demand side management, where reduction of energy usage through energy efficiency measures at the customer level leads to large electricity savings at the grid level.

[22] FN 60. Managing the future of grid.

[23] https://thehill.com/blogs/pundits-blog/energy-environment/283222-net-metering-for-solar-power-sounds-simple-but-is-it cite to actual dockets?

[24] https://www.nrel.gov/docs/fy13osti/58465.pdf at 1.

[25] Can we get it right? FN 271.

[26] Id. at FN 335, 340

[27] Id at 337.

[28] Id. at. 360.

[29] CWGIR? FN 305.

[30] FN 304

[31] http://interchange.puc.state.tx.us/Documents/35994_114_613205.PDF

[32] Id at 3.

[33] Cite to actual IRS documents or a recap?