Energy storage development has lagged far behind the development of variable renewable energy resources. Significant flexibility existing in today’s power systems is being tapped more extensively to accommodate the new variability. More emphasis is being placed on market efficiencies and demand side management to find sources of flexibility needed to accommodate the new variable energy resources. The resilience and flexibility of the existing system (both resources and institutional/market structures) are rightly being developed to the fullest extent before embarking on highly capital-intensive new resources. Nevertheless, with the expansion of variable generation expected to continue, power systems must be prepared to add flexibility beyond what may be available today, and to do so in an economic, reliable, and environmentally benign manner.
There are significant efforts underway to address some of the barriers faced by energy storage. Most notably the recent FERC orders (755 and 784) have the effect of opening ancillary service markets to energy storage. Policies are being implemented at the state level as well, both for implementing the FERC orders and to encourage or outright mandate energy storage development. For example, California’s legislation directing the California Public Utilities Commission to develop methodology for calculating levels of economic energy storage for state utilities to target. These policies and proposals represent recognition that the playing field needs to be adjusted to ensure fair and appropriate development of energy storage.

Valuation and Markets

The value of energy storage has historically been based on the difference between light load hour prices and the higher prices during heavy load hours in the wholesale electric market. This represents the expectation that the main value of energy storage derives from purchasing low price electric power at night for storage, and generating during the day when prices are higher. The reality is more complex than that. Storage brings all the values associated with other generation including: the provision of ancillary services such as contingency reserves; regulation and load following reserve; and transmission and/or distribution system support.

Regulatory commissions have a role in the assessment methodology. In Oregon for example, the state PUC has asked utilities to calculate the availability of, and demand for, flexible resources. In the organized markets such as the California Independent System Operator (CAISO), ancillary service markets have been in operation for over a decade, and historically were largely irrelevant to total market value (e.g., in the range of 1-2% of total financial settlements in CAISO), but have gotten more attention due to the focus on improving the quality of frequency regulation and response.

FERC orders 890, 755 and 78436 mandated organized markets to specifically recognize the quality (e.g., ramp rate and response time) of generation bidding into the markets while also requiring more standardization of payments for these services outside the organized markets. Ancillary service markets have already begun opening the door to energy storage technologies where they have been implemented (e.g., a 20 MW flywheel project in the New York ISO and a 1 MW battery in PJM).

These investments were made possible, in large part, by Order 890, which was issued by the Federal Energy Regulatory Commission (FERC) in 2007 and requires wholesale markets to consider non-generation resources (including storage and DR) for grid services.

Regulatory Treatment

The regulatory treatment of storage faces significant, but different challenge in both the traditional vertically integrated utility structures and the new restructured markets. In a traditional regulated market, utilities are allowed to rate base “prudent” generation, transmission, and distribution investments in meeting targeted levels of system adequacy and reliability. Storage investments are recovered similarly as part of a least-cost plan.

Valuation techniques are becoming available, but are still not common and the need for ancillary services may not be well defined or recognized fully by regulators. In addition to ancillary services is treatment of emissions in the regulatory environment. Historically, utilities and regulators focused on environmental compliance. Environmental regulation of carbon dioxide emissions is still at an early stage. In some jurisdictions utilities have adopted, or allowed to adopt, carbon pricing in considering competing resource expansion options. California’s cap and trade system, and British Columbia’s carbon tax are explicit expressions of carbon cost that may be taken into account. The Environmental Protection Agency is beginning to regulate carbon emissions as well. The direction for reduced carbon emissions seems clear and some utilities are becoming more concerned over the risk of future, potentially much more stringent, carbon emission regulation.

Development Risk

Uncertainty and lack of the ability to rely on markets and regulatory structures to reflect the value of energy storage increases development risk, and discourages potential new market entrants and technologies. Relatively more complex valuation techniques needed to reflect energy storage prudence to regulators might discourage utility planners and management from pursuing prudence declarations with their regulators.  These uncertainties contribute to development risk, discourage third party development, and can dampen interest in utility personnel from pursuing energy storage from the regulatory commissions.

Policies can be adopted to manage risks to encourage responsible development. Policies that seek to remove barriers or even encourage energy storage can be mechanisms for managing risk.