Energy & Infrastructure Alert
On February 15, 2018 the Federal Energy Regulatory Commission issued a final rule directing regional transmission organizations and independent transmission system operators to revise their rules to facilitate the participation of “electric storage resources” in wholesale energy, capacity and ancillary services markets. The rule, which does not apply to utilities that are not members of an RTO or ISO, largely adopts proposals set down under the previous administration, ending over a year of speculation as to how a Republican-led FERC might address the same issues. Although it will take approximately two years before RTO actions to implement the final rule are in place, FERC’s order and rule represent a major step forward for energy storage resources that participate in organized wholesale electricity markets.
Under FERC’s rule, RTOs must revise their rules addressing how energy storage resources can participate in wholesale electric markets to (1) ensure that storage resources are eligible to provide all capacity, energy and ancillary services that they are technically capable of providing; (2) ensure that a storage resource participating in wholesale markets can be dispatched and can set the market clearing price as a seller and as a buyer of electric products; (3) account for the physical and operational characteristics of storage resources through bidding parameters or other means; and (4) establish a minimum size requirement of no more than 100 kilowatts for participation in RTO markets. RTOs must submit revisions to their wholesale market tariffs reflecting the revised participation model to FERC within 270 days from publication of the final rule in the Federal Register. RTOs will have another year to implement these market reforms.
As an initial step, FERC is revising its regulations to define an electric storage resource as “a resource capable of receiving energy from the grid and storing it for later injection of electric energy back to the grid.” FERC states that this definition is intended to include all types of electric storage resources, regardless of their technology (e.g. batteries, flywheels, compressed air, and pumped-hydro) or whether they are located on the interstate transmission system or on a distribution system. Behind-the-meter installations can qualify as electric storage resources if they deliver power to the transmission grid. According to FERC, behind-the-meter resources that sell electricity to their host site or another retail consumer can already participate in wholesale markets as demand response resources.
In response to the final rule, RTOs must revise their rules for wholesale market participation – referred to as “participation models” – to facilitate the integration of storage resources while taking into account storage resources’ unique physical and operational characteristics. FERC did not prescribe specific market rules, leaving flexibility for RTOs to develop rules that best suit their individual market designs, but the resulting tariff revisions must satisfy certain minimum requirements. First, RTO tariffs must provide standard qualification criteria that an electric storage resource must satisfy to participate in wholesale markets. The qualification criteria must not limit participation to any particular technology, and must be based on the physical and operational characteristics of storage resources. Second, RTO tariffs must specify (1) whether qualifying storage resources will participate using existing or new market participation agreements, and (2) whether any particular existing market rules will apply to electric storage resources.
Under the final rule, as a condition of participating in any particular wholesale market, a storage resource must be technically capable of providing the applicable service, meaning that it must be able to “meet all of the technical, operational, and/or performance requirements that are necessary to reliably provide that service.” Unlike conventional generating technologies, which can generate as long as fuel or another energy input is available, electric storage resources have a finite run-time before they must recharge or otherwise refresh their stored energy, which can sometimes be extended if the resource does not discharge its full capacity all at once. Accordingly, FERC is directing RTOs to allow storage resources to de-rate their capacity to meet minimum run-time requirements. For example, an owner of a lithium ion battery installation that has a maximum storage capacity of 10 megawatts and can operate for four hours at full capacity might choose to de-rate the capacity of the resource to 5 megawatts and so be able to operate for eight hours. However, FERC cautions that storage resources must not de-rate the capacity of their resources below any capacity obligations that they have assumed. In addition, the ability to de-rate does not exempt a storage resource that is participating in RTO capacity markets from penalties for non-performance.
One of the key components of the final rule is that it requires RTOs to sell energy to storage resources at the applicable locational marginal price (LMP). This requirement means that storage resources that sell power in RTO markets are freed from having to pay the generally higher retail electric rates for energy to charge their storage resources. To avoid any potential arbitrage between zonal and nodal LMPs, FERC is directing RTOs to sell power to storage resources at the nodal LMP. In addition, the tariff revisions to be adopted by RTOs must ensure that a storage resource is capable of setting the LMP as seller or buyer. RTO tariffs must (1) permit storage resources to set the price in capacity auctions, where applicable, (2) require RTOs to accept bids from storage resources to buy energy, and (3) allow storage resources to participate in the RTO markets as price takers, meaning that they will accept the clearing price no matter how low or high. In order to benefit from these rules, storage resources must be capable of responding to dispatch instructions from the RTO.
Unlike traditional generation facilities, storage resources are capable of acting as both supply and demand, taking power from the grid when there is less demand and lower prices, and supplying power to the grid during periods of peak demand and higher prices. To reflect these operational capabilities, FERC directed RTOs to revise their tariffs to allow storage resources to participate in wholesale markets as both supply and demand resources by dispatching them in accordance with their most economically efficient use. However, since a storage resource could use a bidding strategy that results in conflicting dispatch signals from the RTO to buy and sell power during the same scheduling interval, it would be insufficient to rely on electric storage resources to resolve these conflicting dispatch signals. Accordingly, FERC is requiring RTOs to develop market rules that will prevent conflicting dispatch signals in the same market interval.
There may be circumstances in which an RTO could manually dispatch a storage device as demand when the price for energy is above the price of the resource’s bid to buy. Similarly, an RTO could dispatch a storage resource as supply when the price for energy is below the price of the resource’s bid to supply. Accordingly, the participation models developed in response to the final rule must include make-whole payments to compensate storage resources when they are dispatched uneconomically by the RTO.
The dual nature of storage resources, as both supply and demand resources, combined with their unique physical and operational characteristics, requires bidding and participation strategies that differ from those relating to traditional generation facilities. In FERC’s view, participation models must account for these characteristics in order to enable storage resources to provide all of the services they are capable of providing. Accordingly, the participation models developed by each RTO must account for the following physical and operational characteristics of storage resources through bidding parameters or other means:
The final rule provides flexibility in how RTOs account for these characteristics. For example, RTOs can include requirements for storage resources to submit information regarding their physical and operational characteristics. However, RTOs must adopt flexible participation models that allow each storage resource to represent its physical and operational characteristics. In addition, RTOs and ISOs must acknowledge a storage resource’s commercial obligations in accounting for its physical and operational characteristics. Finally, FERC ruled that in order to optimize operation of electric storage resources to provide all of the wholesale services they are technical capable of providing, RTOs must allow storage resource operators to manage their own state of charge.
FERC’s final rule on participation of energy storage resources in wholesale electric markets represents significant advance for the storage industry. Although RTOs currently offer a range of participation opportunities for storage resources, the final rule will ensure that these resources can participate in every RTO market in which they are capable of providing service. Even though it may be approximately two years before the tariff changes required by the final rule are implemented, developers of energy storage resources should be encouraged by FERC’s action.
A copy of the final rule can be viewed by clicking here.
Click here to view the authors’ previous article on FERC’s energy storage initiatives.
 The most significant departure from the proposed rule was the decision to postpone directing RTOs to revise their rules to facilitate participation of aggregated distributed energy resources, such as small solar installations, in wholesale markets. FERC will hold a technical conference in April to explore opportunities for participation of aggregated distributed energy resources in wholesale electric markets.
 “RTO” as used herein refers to FERC-approved regional transmission organizations and independent system operators.