Markets and regulation

Energy storage represents a new type of power system asset, able to act as both generation and load. As such, it may require additional regulations and adjustments to existing market and regulatory structures to ensure that the full value of energy storage can be utilized to the benefit of all stakeholders.

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Allowing energy storage to interconnect to the power system or to provide a certain service can spur the deployment of energy storage. Ambiguous regulations around energy storage can deter developers from building projects, as this can introduce uncertainty about the ability of prospective storage projects to: (1) interconnect to the power system in a timely manner, (2) operate the system to its full technical extent due to unclear operational guidelines, or (3) participate in established markets or private contracts to provide services and seek compensation. Clear guidelines around energy storage, including the technical capabilities the system must have, can make it easier to determine whether a given project should be pursued. Regulators can help provide clarity to energy storage developers, customers, and utilities by explicitly stating under what conditions existing regulations apply to energy storage systems.
Energy storage can often respond significantly faster and more accurately than conventional generators; however, existing market structures may not reward storage systems for this performance. “Pay-for-performance” structures that reward more accurate or faster reactions can help incentivize additional storage deployments while ensuring an overall more efficient operation of the power system. Additional market rules may need to be revisited to ensure energy storage projects can be rewarded for their full value. Many critical services in power systems are not financially compensated, but rather are expected from conventional generators or are provided by generators automatically. Services like, or equivalent to, inertia or black start, which are critical to a reliable power system, can be provided or mimicked by energy storage systems. However, if these services are not financially compensated, energy storage will not be incentivized to provide them. Creating market products that compensate resources in a technology-agnostic way for all of the services it can potentially provide can help promote the most efficient mix of resources to ensure a reliable power system, while allowing newer technologies like energy storage to fairly compete and utilize its full range of capabilities.

In addition to ensuring a fair, technology neutral market, energy storage may require explicit policy support as a new technology. In jurisdictions around the world, policymakers have set energy storage goals and mandates. Existing mechanisms for encouraging renewable energy deployment, such as renewable energy standards, can be adapted to spur energy storage deployment as well. Such adaptations include providing carve-outs or credit multipliers for renewable generation paired with energy storage.

Additional considerations for behind-the-meter systems

As behind-the-meter energy storage systems may not be owned or operated by utilities, ensuring their safe and reliable operation may require additional consideration from regulators. Interconnection processes can be a good way to ensure that energy storage is properly installed, has the appropriate equipment, and is operated to avoid negatively impacting the broader power system. For example, many interconnection processes are currently written explicitly for solar PV systems and there may be considerable uncertainty around whether, or how, energy storage is considered in the process. Explicitly outlining a process that includes energy storage, either as standalone or coupled with power plants, and indicating which charging and discharging regimes are allowed can improve investor and offtaker certainty, driving deployments.

Finally, regulators can incentivize ‘grid friendly’ operation of behind-the-meter energy storage systems through appropriate retail tariff design and compensation mechanisms. More cost-reflective retail tariffs (e.g. those featuring time-of-use energy charges or demand charges), unlike time-invariant volumetric energy charges, can help align customer incentives with the needs of the broader power system. The benefits derived from more cost-reflective retail tariffs, however, must be weighed against the additional complexity incurred for both utilities charged with billing customers and the customers themselves, who may not have the means to reasonably adjust their demand or interpret more complex rates.

 Example Interventions:

  1. Streamline implementation of new energy storage regulations to reduce administrative delays that limit storage deployment.
  2. Address revenue compensation mechanisms and market shortcomings for the services offered by energy storage resources. These can include:
    1. Explicitly allow storage systems to provide system services
    2. Ensure that the unique technical characteristics of storage (e.g., fast response time, ability to act as both a load and supply source) are properly compensated
    3. Remove barriers to value-stacking.
  3. Incorporate energy storage into interconnection processes, reducing uncertainty around their deployment behind the meter and dictating how energy storage can charge and discharge.
  4. Establish (or modify existing) renewable energy mandates, goals, tax rebates and other direct interventions to explicitly include energy storage.
  5. Develop pilot projects to increase utility awareness of/experience with using energy storage to provide services to multiple customers.
  6. Design retail tariffs specific to customers with energy storage that incentivize more ‘grid-friendly’ behavior from the storage systems. Alternatively, expand existing rates for customers with DPV to include DPV-plus-storage customers.

Reading List and Case Studies

Battery Storage in the United States: an Update on Market Trends

U.S. Energy Information Administration, 2020

This report explores trends in battery storage capacity additions in the United States and describes the state of the market as of 2018, including information on applications, cost, ongoing trends, and market and policy drivers. These observations consider both power capacity and energy capacity (the total amount of energy that can be stored by a battery system).

 Market and Policy Barriers to Energy Storage Deployment

 Sandia National Laboratory, September 2013

This report details the barriers that restrict the deployment of energy storage technologies in the United States. The findings are based on interviews with stakeholders and review of regulatory filings in four regions that are roughly representative of the country. The report suggests that while high capital costs remain a barrier to energy storage, deployment is also impacted by regulatory, market, and business model barriers. The report also presents a discussion of possible solutions to address these barriers and a review of initiatives around the country at the federal, regional, and state levels.

 Managing the Future of Energy Storage: Implications for Greenhouse Gas Emissions

Institute for Policy Integrity, 2018

This report seeks to be a resource to policymakers interested in maximizing the benefits of energy storage. It highlights the underappreciated benefits of energy storage and discusses the ways in which current policies are failing to encourage socially optimal deployment of storage technology. 

Regulatory and Policy Examples

FERC Order 841: Electric Storage Participation in Markets Operated by Regional Transmission Organizations and Independent System Operators

Federal Energy Regulatory Commission, February 2018

FERC Order 841 is a final rule from the United States Department of Energy’s Federal Energy Regulatory Commission (FERC) that directs RTOs and ISOs to develop tariffs to integrate electric storage into all electric (capacity, energy, and ancillary service) markets. This rule is expected to usher in the wider use of electric storage and, in turn, result in greater integration of intermittent and variable renewable energy onto the grid. The rule applies to all storage capable of both charging from and discharging to the grid, regardless of whether it was a behind-the-meter, distribution, or transmission level system. In May 2019, citing their jurisdictional authority, FERC commissioners declined to allow states to opt out of this rule.

 Frequency Regulation Compensation in the Organized Wholesale Power Markets Vol. Order No. 755

Federal Energy Regulatory Commission, 2011

In this regulation, the U.S. Federal Energy Regulatory Commission (FERC), ensures that all providers of frequency regulation receive just, reasonable, and indiscriminatory rates and procurement treatment, in effect leveling the playing field for renewable energy sources and energy storage to participate in wholesale electricity markets for key services. Furthermore, the regulation directs market operators to adjust compensation for a given service based on the quality of the service (pay for performance). This provides additional incentives for the deployment of energy storage, which can provide high quality services by responding rapidly and accurately to market signals.

Decision on Multiple-Use Application Issues. Rulemaking 15-03-011

California Public Utilities Commission, 2018

This decision provides direction to utilities on how to promote the ability of storage resources to realize their full economic value while providing multiple benefits and services to the electricity system. The eleven rules adopted by the California Public Utilities Commission to govern evaluation of these multiple-use energy storage applications are included, along with definitions of service domains, reliability services, and non-reliability services. These rules place significant emphasis on ensuring that energy-limited resources like energy storage are capable of providing critical reliability services in response to emergencies, regardless of any additional non-reliability services they may be contracted to provide.

 Decision Revising the Self-Generation Incentive Program Pursuant to Assembly Bill 1637 and Granting the Petition for Modification of Decision 16-06-055 by the California Solar Energy Industry Association. Vol. Decision 17-04-17

California Public Utilities Commission, 2017

This decision increases the budget for California’s Self-Generation Incentive Program (SGIP) consistent with the authorization established by Assembly Bill (AB) 1637 (Low, 2016) and allocates the additional funding authorized by AB 1637 to the energy storage and renewable generation technologies incentive budgets. 

Order Instituting Rulemaking Pursuant to Assembly Bill 2514 to Consider the Adoption of Procurement Targets for Viable and Cost-Effective Energy Storage Systems. Decision 13-10-040

California Public Utilities Commission , 2013

This decision establishes the policies and mechanisms for procurement of electric energy storage pursuant to Assembly Bill 2514 (Pub. Util. Code § 2836 et seq.). This decision establishes a target of 1,325 megawatts (MW) of energy storage to be procured by Pacific Gas and Electric Company, Southern California Edison Company and San Diego Gas & Electric Company by 2020, with installations required no later than the end of 2024, and sets a schedule for procurement of energy storage.

The benefits derived from more cost-reflective retail tariffs, however, must be weighed against the additional complexity incurred for both utilities charged with billing customers and the customers themselves, who may not have the means to reasonably adjust their demand or interpret more complex rates

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