Market Barriers Eased for Energy Storage Resources

The Federal Energy Regulatory Commission (FERC) adopted a final rule on February 15 (Order No. 841) that facilitates the direct participation of electric storage resources in centralized markets operated by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs). In its order, FERC directs RTOs and ISOs to revise their tariffs to establish a new participation model that recognizes the physical and operational characteristics of electric storage resources. Rather than imposing a specific participation model on the RTOs and ISOs, FERC instead sets forth certain minimum requirements that must be met when proposing market rules.

FERC defines an electric storage resource as one capable of receiving electric energy from the grid and storing it for later injection back to the grid. It makes clear that the definition is intended to cover a range of technologies that includes batteries, flywheels, and hydro pumped storage.

Commenters raised concerns that the participation model may be abused by retail customers seeking to avoid paying the retail rate for energy consumption by paying the wholesale locational marginal price for such purchases and falsely claiming they are for wholesale purposes to charge the storage facilities and later sell back to the wholesale market. FERC addresses these concerns by requiring the implementation of certain direct metering and accounting practices that distinguish between wholesale and retail activity.

Participating in RTO and ISO Markets

Order No. 841 is intended to incent the development and market participation of a variety of electric storage resources, including resources located on distribution systems or behind the meter. An electric storage resource that receives, stores, and later injects electric energy into the grid as part of its participation in RTO or ISO markets engages in a FERC-jurisdictional sale of electric energy at wholesale, regardless of whether the electric storage resource is located on the transmission system, on a distribution system, or behind the meter.

The participation in wholesale markets of such electric storage resources, including those connected at or below distribution-level voltages, means that these electric storage resources may become subject to FERC’s rules and regulations pursuant to the Federal Power Act (FPA). Thus, while Order No. 841 eases market access for electric storage resources to participate in centralized power markets, the result of such participation may require compliance by the owners of those resources—including relatively small resources of 100 kW—with a wide range of FERC requirements pursuant to the FPA. The conditions could include filing rates pursuant to FPA section 205, obtaining market-based rate authority where applicable, submitting FPA section 203 filings related to corporate mergers, FERC accounting obligations, and FERC interlocking directorate obligations.

Another feature of Order No. 841’s application to resources located on both the distribution and transmission system may be inconsistent interconnection procedures for connecting electric storage resources. Specifically, interconnection of such resources to transmission facilities covered by a transmission provider’s Open Access Transmission Tariff (OATT) will be subject to FERC’s pro forma interconnection procedures, while interconnection to distribution facilities that are not covered by a transmission provider’s OATT will be subject to state interconnection procedures.

Additionally, many states do not have uniform or pro forma interconnection procedures. Instead, interconnection procedures are handled by these states through individual filings with the state regulatory commissions. As a result, the interconnection process for electric storage resources may vary widely depending on the point of interconnection across the electric system and from state to state.

Energy Storage and Renewables Benefit, Peaking Units May Suffer

Order No. 841 benefits the energy storage industry by expanding the viability of electric storage resources into larger ancillary services, and wholesale energy and capacity markets beyond the current limited applications that generally involve fast-responding frequency regulation markets. Order No. 841’s requirements may result in energy storage providers having an identified backstop revenue source in centralized markets, which can further facilitate financing and deployment of such projects.

Renewable energy resources may also benefit from Order No. 841 by the increasing interest in co-locating or co-developing renewable facilities with electric storage resources to address operational challenges to quick dispatch and firm up portions of the variable production of renewable resources like wind and solar. To the extent Order No. 841 broadens the deployment of electric storage resources, such increased availability may make such “renewable-plus-storage” development options more attractive.

Many anticipate that Order No. 841 could result in challenges for the owners of certain merchant facilities, including marginally economic peaker units. To the extent that traditional peaker units only run during brief periods of high demand for electricity, electric storage resources may be capable of dispatching more economically to address the demand and may keep such peaker units from clearing the market, thus displacing them. In this respect, the rule may make it difficult for certain marginal peaker units to participate economically in RTO and ISO markets if the increased participation of electric storage units encouraged by Order No. 841 takes place as FERC anticipates. ■

Seth Lucia is a counsel, Michael Brooks is a partner, and Blake Urban is an associate with Bracewell LLP in the firm’s Washington, D.C. office.