The Emerging Regulatory and Policy Landscape for Grid-Scale Electric Energy Storage
By Hunter Ellis
A fundamental principle of electricity market design says that electricity cannot be economically stored. Ensuring reliable and stable electric service thus requires grid operators to instantaneously balance electricity supply and demand. Recently though, innovative energy storage companies backed by intrepid investors have been challenging the assumptions that underlie the contemporary electric system. Demonstration and commercial projects initiated across the U.S. have showcased the technical and economic viability of emerging storage technologies across a range of grid applications. Yet further breakthroughs for grid-scale storage will critically depend on continued regulatory and policy support.
The policy and regulatory framework for grid energy storage is just beginning to take shape.
According to Lux Research, a market-research firm, global investment in grid-connected storage projects exceeded $2.8 billion in 2012 and could surpass $113.5 billion by 2017. This upsurge in interest will be driven chiefly by the aggressive deployment of renewable resources, which disturb the stability of the grid. Energy storage facilitates higher levels of renewable penetration in the power mix by smoothing and time-shifting that intermittent power. Fast-responding storage technologies such as batteries and flywheels are also particularly well-suited for providing ancillary services — such as frequency regulation — which correct short-term fluctuations in supply and demand. Moreover, much excitement in the power industry has focused on the ability of bulk storage systems to store energy generated in off-peak hours for later use during high-demand, peak load periods. This energy shifting capability reduces the need for redundant generation assets and can defer costly grid upgrades.
The extent to which these benefits accrue to the grid system will be determined by the future regulatory and policy environment for energy storage. Until recently, regulatory and policy milestones for storage were few and far in between, impeding the market adoption of newer technologies. The last few years, though, have seen developments that have begun to open market opportunities for energy storage.
On the regulatory side, the storage industry has gained strong momentum from a recent series of rulings by the Federal Energy Regulatory Commission (FERC). Among other activities, FERC regulates six of the seven U.S. grid operators of the organized wholesale electricity markets. These markets operate in about one-half of the states and serve roughly two-thirds of U.S. electricity consumers. Electricity market rules were originally developed in an environment dominated by fossil-fuel generation units, which have traditionally supplied both power and ancillary services. As such, established market structures posed barriers to the inclusion of energy storage resources in electricity markets.
In 2007, FERC issued Order No. 890 to address these market barriers. Order No. 890 directs grid operators to modify their market rules and tariffs so non-generating resources, such as energy storage, can fully participate in ancillary services markets. Despite gaining increased market access, storage devices still faced an unfavorable compensation model, which compensated valued their rapid and accurate regulation services in the same manner as slow-ramping traditional suppliers. To correct this situation, FERC issued Order No. 755 (2011), requiring grid operators to compensate frequency regulation providers for the speed and accuracy of their performance. The full implementation of these rules by grid operators over coming years will significantly increase the market adoption of storage technologies.
Energy storage is expected to play a pivotal role in enabling the increased penetration of renewable resources on the grid.
While the recent FERC initiatives signal steps in the right direction, energy storage still faces formidable regulatory obstacles. Perhaps the most significant barrier involves regulatory uncertainty over storage asset classification and market participation rules. Storage technologies present a complex challenge to regulators as they can provide a range of services, including generation, transmission, distribution, and regulation. The problem arises in that current market rules generally prohibit transmission assets from participating in wholesale generation and ancillar
y service markets due to market manipulation concerns. Energy storage is therefore limited in its ability to recover capital costs and revenue through multiple value streams. The ultimate success of storage will depend on regulators’ willingness to formulate creative solutions that enable the monetization of benefits across the entire electricity value chain.
Federal policy support over the last few years has also hastened the development and deployment of grid-scale storage technologies. The 2009 stimulus package has sometimes been described as the largest energy bill ever passed; grid-scale storage was not overlooked. That legislation provided the U.S. Department of Energy (DOE) with significant funding to implement the Energy Storage Program. As part of that initiative, the DOE committed $184.9 million in matching funds to support 16 demonstration projects—totaling 537 MW of capacity— across a wide spectrum of storage technologies. The DOE’s APRA-E initiative has also been noteworthy in its support of storage, supplying more than $49 million towards early stage R&D for grid-scale technologies.
At a time when additional R&D is still needed to increase the cost-competitiveness of emerging storage technologies, the future of federal subsidies remains highly uncertain. Nevertheless, legislation has been introduced in every congressional session since 2009 that would create a 20% investment tax credit (ITC) for grid-connected storage investments. By subsidizing a portion of upfront capital costs, the proposed ITC would make storage projects more palatable for investors.
In the funding domain, state regulation and policy will also come into play. Increasingly, state electricity regulators —or public utility commissions (PUCs)—are allowing regulated utilities to recover prudent costs related to storage investments. In 2009, for instance, the PUC of Texas approved a utility’s cost recovery request for a $25 million sodium-sulfur battery installation — the largest grid-connected battery system in the U.S. at the time. After prodding from Assembly Bill 2514 (2010), the California PUC has established a precedent-setting mandate requiring that utilities invest in grid-scale storage systems. Continued state-level initiatives along these lines will be crucial for increasing the uptake of storage by the historically risk-averse utility sector.
Looking forward, it will be incumbent on the energy storage industry to continue cutting capital costs and improving technology performance. Nevertheless, the onus is on regulators and policymakers to continue taking bold and proactive steps towards eliminating electricity market barriers and stimulating energy storage innovation and commercialization. Their pursuit of these worthwhile endeavors may well determine the stability and efficiency of our future power grid.
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Hunter Ellis is a second-year student at Stanford Law School and is also pursuing a MS degree in Environment and Resources, with a focus on energy. As a researcher at the Steyer-Taylor Center for Energy Policy and Finance, he is exploring the regulatory and financial barriers to clean technology commercialization. He holds a BA in Government from Cornell University.
