Building More Energy Storage Means Building the Right Incentives

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In recent years, the falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other competing storage technologies—such as pumped hydro, compressed air, and reversible fuel-cells—we can’t ignore the need to create smart ways to pay for their installation and operation in the face of changing demand.

In a future with a renewable grid, energy storage will be used for more than just load balancing the grid from the day-to-day needs caused by our variable energy sources and different levels of customer demand. It could be required to potentially store large quantities of energy for periods of weeks to months to facilitate energy consumption during peak periods such as winter heating months. To enable the proliferation of renewable power, long-term energy storage will become just as important a service as short-term power supply.

Due to the fickle nature of energy demand and supply, these storage assets may or may not be used on any given day. Storage providers will need to be incentivized to build storage and be paid for it even if the resource is underutilized. If they aren’t, they will be unlikely to build enough storage capacity and the grid operator may be forced into the use of expensive, short-term peak power (with higher prices that get passed on to customers).

Bloomberg’s BNEF reports that the amount of deployed energy storage will multiply by 122 times, from “9GW/17GWh deployed as of 2018 to 1,095GW/2,850GWh by 2040” and this growth will be primarily driven by a halving of the cost of batteries by 2030. Moreover, there are many energy storage projects being built in conjunction with renewable power developments due to these falling costs and the ability to balance intermittency. Smart contracting for storage could help accelerate this deployment of utility scale storage assets. 

We reviewed a public request for proposal contract that was made available a few years ago by Southern California Edison (SCE), and found that this contract included three sources of income for an energy storage operator:

  1. An ongoing payment for capacity of energy (watt-hours) provided
  2. Compensation for operations and maintenance cost of the storage unit
  3. A multiplier to the payment, if the monthly utilization of the unit met certain requirements

Conversations with players in the battery storage space (such as AMS, which develops artificial intelligence to price and dispatch energy storage) have indicated that batteries also provide ancillary services like regulating the frequency of power. Tiny injections of stored power can help the grid and the individual electricity power markets to maintain their frequency (Hz) requirements.

Though these contracts seem fair at surface level, the key element to note is the utilization related payment. If we have to build more storage than is needed on the average day, we must also build extra storage for days with peak energy demand. 

Since this extra storage may not be utilized frequently, storage contracts should integrate a minimum payment scheme that gives a base payment to the operator no matter what the utilization rate of the battery is, and therefore ensure the operator is compensated appropriately for their investment. Unlike the SCE contract, there might be no penalty for failing to meet utilization requirements (unless there was a mechanical failure) and the storage operator could earn a bonus for high utilization. This would be a way to incentivize enough storage to be built to continue supporting the ongoing energy transition.  

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In recent years, the falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other competing storage technologies—such as pumped hydro, compressed air, and reversible fuel-cells—we can’t ignore the need to create smart ways to pay for their installation and operation in the face of changing demand.

In a future with a renewable grid, energy storage will be used for more than just load balancing the grid from the day-to-day needs caused by our variable energy sources and different levels of customer demand. It could be required to potentially store large quantities of energy for periods of weeks to months to facilitate energy consumption during peak periods such as winter heating months. To enable the proliferation of renewable power, long-term energy storage will become just as important a service as short-term power supply.

Due to the fickle nature of energy demand and supply, these storage assets may or may not be used on any given day. Storage providers will need to be incentivized to build storage and be paid for it even if the resource is underutilized. If they aren’t, they will be unlikely to build enough storage capacity and the grid operator may be forced into the use of expensive, short-term peak power (with higher prices that get passed on to customers).

Bloomberg’s BNEF reports that the amount of deployed energy storage will multiply by 122 times, from “9GW/17GWh deployed as of 2018 to 1,095GW/2,850GWh by 2040” and this growth will be primarily driven by a halving of the cost of batteries by 2030. Moreover, there are many energy storage projects being built in conjunction with renewable power developments due to these falling costs and the ability to balance intermittency. Smart contracting for storage could help accelerate this deployment of utility scale storage assets. 

We reviewed a public request for proposal contract that was made available a few years ago by Southern California Edison (SCE), and found that this contract included three sources of income for an energy storage operator:

  1. An ongoing payment for capacity of energy (watt-hours) provided
  2. Compensation for operations and maintenance cost of the storage unit
  3. A multiplier to the payment, if the monthly utilization of the unit met certain requirements

Conversations with players in the battery storage space (such as AMS, which develops artificial intelligence to price and dispatch energy storage) have indicated that batteries also provide ancillary services like regulating the frequency of power. Tiny injections of stored power can help the grid and the individual electricity power markets to maintain their frequency (Hz) requirements.

Though these contracts seem fair at surface level, the key element to note is the utilization related payment. If we have to build more storage than is needed on the average day, we must also build extra storage for days with peak energy demand. 

Since this extra storage may not be utilized frequently, storage contracts should integrate a minimum payment scheme that gives a base payment to the operator no matter what the utilization rate of the battery is, and therefore ensure the operator is compensated appropriately for their investment. Unlike the SCE contract, there might be no penalty for failing to meet utilization requirements (unless there was a mechanical failure) and the storage operator could earn a bonus for high utilization. This would be a way to incentivize enough storage to be built to continue supporting the ongoing energy transition.  

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is currently pursuing a master's in business administration from the Wharton School amd a master's in international studies from the Lauder Institute.

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is currently pursuing a master's in business administration from the Wharton School amd a master's in international studies from the Lauder Institute.

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The falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other storage technologies, there is a need to create smart ways to pay for their installation and operation.

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The falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other storage technologies, there is a need to create smart ways to pay for their installation and operation.

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New energy storage technologies are increasingly connecting to the electric grid, but it’s not clear that current rules in electricity markets are designed to help storage and new distributed energy resources (DER) participate as fully as other generation.  The federal government’s electricity market regulator, FERC, has issued a notice with proposed rules that could create new opportunities for deployment and investment but also raise questions for stakeholders to address.

Guest Ken Kulak is a partner at the law firm of Morgan Lewis, where he advises clients on energy regulation and complex energy transactions. He has worked on a wide variety of renewable energy projects and helps clients navigate the legal issues associated with the development, purchase, sale and financing of renewable energy in evolving regulatory frameworks.

 

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New energy storage technologies are increasingly connecting to the electric grid, but it’s not clear that current rules in electricity markets are designed to help storage and new distributed energy resources (DER) participate as fully as other generation.  The federal government’s electricity market regulator, FERC, has issued a notice with proposed rules that could create new opportunities for deployment and investment but also raise questions for stakeholders to address.

Guest Ken Kulak is a partner at the law firm of Morgan Lewis, where he advises clients on energy regulation and complex energy transactions. He has worked on a wide variety of renewable energy projects and helps clients navigate the legal issues associated with the development, purchase, sale and financing of renewable energy in evolving regulatory frameworks.

 

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Energy storage in electricity markets is on the rise, and the Federal Energy Regulatory Commission (FERC) is weighing in with new rules that could change deployment of storage and distributed energy resources across the country.

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Energy storage in electricity markets is on the rise, and the Federal Energy Regulatory Commission (FERC) is weighing in with new rules that could change deployment of storage and distributed energy resources across the country.

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At the end of March, Florida Power and Light (FPL) announced that the company will build the world’s largest battery storage system to complement its existing solar power plant, to begin operations in late 2021. The system will be a 409-MW/900-MWh battery storage facility, around four times the storage capacity of the world’s current largest battery system at the Hornsdale Power Reserve in Australia.

The U.S. energy storage market has seen a major expansion in recent years— the market nearly doubled in 2018 and is expected to double again in 2019. Large utility-scale projects like FPL’s, signal that the industry is maturing and solving operational and financial challenges that previously hindered large-scale deployments.

The Kleinman Center recently invited a panel moderated by Wharton Professor Arthur Van Benthem to speak to the trends and challenges of the energy storage sector. The panelists included:

  • Ravi Manghani: Director of Energy Storage, Wood Mackenzie Power & Renewables
  • Arjun Prasad Ramadevanahalli: Associate, Morgan Lewis Law Firm
  • Paul Reed: Director of Business Development & Account Management, Viridity Energy

Below are the key takeaways to share from this panel:

  • 10x growth: Energy storage is poised for a rapid acceleration of installed capacity, projected to grow more than ten times in the next 5 to 7 years. The growth is driven by several technology and market dynamics, including:
    • High utility demand charges– for commercial and industrial customers, peak demand charges (highest energy consumption rate at any time during the billing period) can compose 40 to 60% of their total utility bill. Storage is a key solution for reducing peak demand.
    • Net energy metering shifts– utilities are pushing back against buying excess energy generated from renewable sources at retail prices; thus, owners of renewable generators are better off storing the energy to be used at a different time than sell the energy back to the grid.
    • Declining system prices– the cost of lithium-ion batteries has decreased 85% between 2014 to 2018 and is continuing to decrease. The cost curve is similar to the ones from the solar industry in recent years.
       
  • Order 841: In a big step forward, the Federal Energy Regulatory Commission (FERC) passed Order 841 this year on February 28 as a mandate to Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to establish market rules for energy storage. These rules should allow storage resources to participate in the market as both a buyer and seller, enabling storage to compete against traditional fossil fuel burning resources such as peaking plants. Many regulatory issues are pending, including understanding the impact to the distribution grid from bidirectional flow, procedures to connect the devices to the grid, and transmission access charges.
     
  • The Swiss army knife of the energy industry: Storage is often called the Swiss army knife of the industry because it can be flexed to perform different functions throughout the value chain, depending on the design and location.
    • Generation– renewables integration/firming (e.g. reserves solar energy, for use at night), microgrids, instantaneous power output
    • Transmission & Distribution (T&D)– frequency regulation, T&D asset deferral, congestion relief
    • Consumption– peak shaving, demand management, back-up supply
       
  • How storage is monetized: Given the flexibility in design and application, storage resources can be monetized through different models at scale.
    • Contracted revenue– a buyer pays the storage owner a fixed charge for its right to utilize the battery’s capacity and charging/discharging
    • Merchant revenue – selling energy from the storage resource back to the wholesale electricity market
    • License– provide ‘energy-storage-as-a-service’ or demand management services to customers

As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. Storage, especially when complemented with renewables, is proving to be the innovation that can address this need. Much progress has been made and today’s market dynamics and new policy structure will continue to push the storage market forward.

[summary] => [format] => full_html [safe_value] =>

At the end of March, Florida Power and Light (FPL) announced that the company will build the world’s largest battery storage system to complement its existing solar power plant, to begin operations in late 2021. The system will be a 409-MW/900-MWh battery storage facility, around four times the storage capacity of the world’s current largest battery system at the Hornsdale Power Reserve in Australia.

The U.S. energy storage market has seen a major expansion in recent years— the market nearly doubled in 2018 and is expected to double again in 2019. Large utility-scale projects like FPL’s, signal that the industry is maturing and solving operational and financial challenges that previously hindered large-scale deployments.

The Kleinman Center recently invited a panel moderated by Wharton Professor Arthur Van Benthem to speak to the trends and challenges of the energy storage sector. The panelists included:

  • Ravi Manghani: Director of Energy Storage, Wood Mackenzie Power & Renewables
  • Arjun Prasad Ramadevanahalli: Associate, Morgan Lewis Law Firm
  • Paul Reed: Director of Business Development & Account Management, Viridity Energy

Below are the key takeaways to share from this panel:

  • 10x growth: Energy storage is poised for a rapid acceleration of installed capacity, projected to grow more than ten times in the next 5 to 7 years. The growth is driven by several technology and market dynamics, including:
    • High utility demand charges– for commercial and industrial customers, peak demand charges (highest energy consumption rate at any time during the billing period) can compose 40 to 60% of their total utility bill. Storage is a key solution for reducing peak demand.
    • Net energy metering shifts– utilities are pushing back against buying excess energy generated from renewable sources at retail prices; thus, owners of renewable generators are better off storing the energy to be used at a different time than sell the energy back to the grid.
    • Declining system prices– the cost of lithium-ion batteries has decreased 85% between 2014 to 2018 and is continuing to decrease. The cost curve is similar to the ones from the solar industry in recent years.
       
  • Order 841: In a big step forward, the Federal Energy Regulatory Commission (FERC) passed Order 841 this year on February 28 as a mandate to Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to establish market rules for energy storage. These rules should allow storage resources to participate in the market as both a buyer and seller, enabling storage to compete against traditional fossil fuel burning resources such as peaking plants. Many regulatory issues are pending, including understanding the impact to the distribution grid from bidirectional flow, procedures to connect the devices to the grid, and transmission access charges.
     
  • The Swiss army knife of the energy industry: Storage is often called the Swiss army knife of the industry because it can be flexed to perform different functions throughout the value chain, depending on the design and location.
    • Generation– renewables integration/firming (e.g. reserves solar energy, for use at night), microgrids, instantaneous power output
    • Transmission & Distribution (T&D)– frequency regulation, T&D asset deferral, congestion relief
    • Consumption– peak shaving, demand management, back-up supply
       
  • How storage is monetized: Given the flexibility in design and application, storage resources can be monetized through different models at scale.
    • Contracted revenue– a buyer pays the storage owner a fixed charge for its right to utilize the battery’s capacity and charging/discharging
    • Merchant revenue – selling energy from the storage resource back to the wholesale electricity market
    • License– provide ‘energy-storage-as-a-service’ or demand management services to customers

As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. Storage, especially when complemented with renewables, is proving to be the innovation that can address this need. Much progress has been made and today’s market dynamics and new policy structure will continue to push the storage market forward.

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As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. A recent panel explored the state of today’s energy storage.

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As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. A recent panel explored the state of today’s energy storage.

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Executive Summary

To maintain reliability, the electric power grid needs to always balance electrical supply with demand. While grid operators pay close attention to forecasting load (i.e. demand) and scheduling generation (i.e. planning for dispatch of generation supply) ahead of time, there will be short-term errors in load forecasts or unexpected fluctuations of power plant output. Because demand and supply need to be balanced almost immediately, these sudden changes necessitate instantaneous adjustments within the timeframe of seconds to minutes. So grid operators rely upon “frequency regulation” resources to correct for these small mismatches between supply and demand. Frequency regulation resources are paid to automatically adjust output according to the operator’s signal in order to respond to these short-term fluctuations.

Traditionally, centralized power plants (like hydropower, steam generators, or combustion turbines) have provided frequency regulation services. Following recent technological and cost improvements, energy storage technologies (including batteries and flywheels) have begun to provide frequency regulation to grid systems as well. In 2012, the PJM Interconnection (PJM)—the regional transmission organization that operates the electricity grid across 13 mid-Atlantic states and D.C.—divided its frequency regulation market into slow and fast components. Fast response resources included energy storage that could absorb or release power very quickly, and more traditional resources like natural gas-fired power plants that could ramp power up and down with a slight delay.

The fast frequency regulation product was initially designed to require resources to provide zero energy on net when averaged over 15 minute periods. This concept, where the cumulative energy input equals the cumulative energy output, is called “energy neutrality.” This design enhanced the ability of energy storage resources to respond to the grid operator’s frequency regulation signals by ensuring the storage resource had available capacity to offer. As a result of this design, a lot of energy storage investment occurred in the PJM region. As of August 2016, PJM accounted for 46 percent of the rated power (MW) of grid-connected battery projects operational in the United States (DOE Office of Electricity Delivery & Energy Reliability 2016). Recently, other regions such as California have seen substantial energy storage deployment.

Frequency regulation has played a large role in energy storage commercialization, and will continue to play a role. But how large a role depends on changes to the design of PJM’s frequency regulation market. PJM embarked on these changes in an effort to correct observed problems in the market. Specifically, some energy storage resources at some instances would be pulling power from the grid in an effort to achieve energy neutrality at the precise time the grid operator needed resources to be injecting power, and vice versa.

Starting in 2015, PJM embarked on a series of changes to its frequency regulation market to correct for observed issues, and more changes are being proposed. Changes implemented to date have resulted in reduced growth rates of energy storage resources in the PJM footprint. The energy storage industry perceives these market changes to be unduly unfair, and is challenging PJM through two complaints before the Federal Energy Regulatory Commission (FERC).

The underlying technological issue facing PJM’s frequency regulation system is that advanced energy storage units can provide quick and accurate responses in a short timescale, but cannot sustain this output for a long time. Consequently, PJM, the energy storage industry, and the Federal Energy Regulatory Commission (FERC) need to resolve a significant market design challenge: How should the market place different technologies on a competitive playing field when their technical characteristics differ fundamentally, all while protecting system reliability? 

This report will focus on the technological and economic aspects of PJM’s frequency regulation market design, while avoiding commenting on the legal nuances of the ongoing complaints. This report first discusses the importance of frequency regulation in relation to compliance with reliability standards. Then it provides an overview of how two central market design dimensions of the PJM frequency regulation system were created: the signal construction and the valuation system for these two different signal types. This article looks at the recent market design changes and seeks to examine their impacts on system reliability as well as energy storage providers. Finally, the article considers the future direction of how energy storage interacts with frequency regulation needs.

[summary] => [format] => full_html [safe_value] =>

Executive Summary

To maintain reliability, the electric power grid needs to always balance electrical supply with demand. While grid operators pay close attention to forecasting load (i.e. demand) and scheduling generation (i.e. planning for dispatch of generation supply) ahead of time, there will be short-term errors in load forecasts or unexpected fluctuations of power plant output. Because demand and supply need to be balanced almost immediately, these sudden changes necessitate instantaneous adjustments within the timeframe of seconds to minutes. So grid operators rely upon “frequency regulation” resources to correct for these small mismatches between supply and demand. Frequency regulation resources are paid to automatically adjust output according to the operator’s signal in order to respond to these short-term fluctuations.

Traditionally, centralized power plants (like hydropower, steam generators, or combustion turbines) have provided frequency regulation services. Following recent technological and cost improvements, energy storage technologies (including batteries and flywheels) have begun to provide frequency regulation to grid systems as well. In 2012, the PJM Interconnection (PJM)—the regional transmission organization that operates the electricity grid across 13 mid-Atlantic states and D.C.—divided its frequency regulation market into slow and fast components. Fast response resources included energy storage that could absorb or release power very quickly, and more traditional resources like natural gas-fired power plants that could ramp power up and down with a slight delay.

The fast frequency regulation product was initially designed to require resources to provide zero energy on net when averaged over 15 minute periods. This concept, where the cumulative energy input equals the cumulative energy output, is called “energy neutrality.” This design enhanced the ability of energy storage resources to respond to the grid operator’s frequency regulation signals by ensuring the storage resource had available capacity to offer. As a result of this design, a lot of energy storage investment occurred in the PJM region. As of August 2016, PJM accounted for 46 percent of the rated power (MW) of grid-connected battery projects operational in the United States (DOE Office of Electricity Delivery & Energy Reliability 2016). Recently, other regions such as California have seen substantial energy storage deployment.

Frequency regulation has played a large role in energy storage commercialization, and will continue to play a role. But how large a role depends on changes to the design of PJM’s frequency regulation market. PJM embarked on these changes in an effort to correct observed problems in the market. Specifically, some energy storage resources at some instances would be pulling power from the grid in an effort to achieve energy neutrality at the precise time the grid operator needed resources to be injecting power, and vice versa.

Starting in 2015, PJM embarked on a series of changes to its frequency regulation market to correct for observed issues, and more changes are being proposed. Changes implemented to date have resulted in reduced growth rates of energy storage resources in the PJM footprint. The energy storage industry perceives these market changes to be unduly unfair, and is challenging PJM through two complaints before the Federal Energy Regulatory Commission (FERC).

The underlying technological issue facing PJM’s frequency regulation system is that advanced energy storage units can provide quick and accurate responses in a short timescale, but cannot sustain this output for a long time. Consequently, PJM, the energy storage industry, and the Federal Energy Regulatory Commission (FERC) need to resolve a significant market design challenge: How should the market place different technologies on a competitive playing field when their technical characteristics differ fundamentally, all while protecting system reliability? 

This report will focus on the technological and economic aspects of PJM’s frequency regulation market design, while avoiding commenting on the legal nuances of the ongoing complaints. This report first discusses the importance of frequency regulation in relation to compliance with reliability standards. Then it provides an overview of how two central market design dimensions of the PJM frequency regulation system were created: the signal construction and the valuation system for these two different signal types. This article looks at the recent market design changes and seeks to examine their impacts on system reliability as well as energy storage providers. Finally, the article considers the future direction of how energy storage interacts with frequency regulation needs.

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The author wishes to acknowledge helpful comments from a reviewer of an earlier draft. Any remaining errors are the responsibility of the author alone.

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The author wishes to acknowledge helpful comments from a reviewer of an earlier draft. Any remaining errors are the responsibility of the author alone.

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In recent years, the falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other competing storage technologies—such as pumped hydro, compressed air, and reversible fuel-cells—we can’t ignore the need to create smart ways to pay for their installation and operation in the face of changing demand.

In a future with a renewable grid, energy storage will be used for more than just load balancing the grid from the day-to-day needs caused by our variable energy sources and different levels of customer demand. It could be required to potentially store large quantities of energy for periods of weeks to months to facilitate energy consumption during peak periods such as winter heating months. To enable the proliferation of renewable power, long-term energy storage will become just as important a service as short-term power supply.

Due to the fickle nature of energy demand and supply, these storage assets may or may not be used on any given day. Storage providers will need to be incentivized to build storage and be paid for it even if the resource is underutilized. If they aren’t, they will be unlikely to build enough storage capacity and the grid operator may be forced into the use of expensive, short-term peak power (with higher prices that get passed on to customers).

Bloomberg’s BNEF reports that the amount of deployed energy storage will multiply by 122 times, from “9GW/17GWh deployed as of 2018 to 1,095GW/2,850GWh by 2040” and this growth will be primarily driven by a halving of the cost of batteries by 2030. Moreover, there are many energy storage projects being built in conjunction with renewable power developments due to these falling costs and the ability to balance intermittency. Smart contracting for storage could help accelerate this deployment of utility scale storage assets. 

We reviewed a public request for proposal contract that was made available a few years ago by Southern California Edison (SCE), and found that this contract included three sources of income for an energy storage operator:

  1. An ongoing payment for capacity of energy (watt-hours) provided
  2. Compensation for operations and maintenance cost of the storage unit
  3. A multiplier to the payment, if the monthly utilization of the unit met certain requirements

Conversations with players in the battery storage space (such as AMS, which develops artificial intelligence to price and dispatch energy storage) have indicated that batteries also provide ancillary services like regulating the frequency of power. Tiny injections of stored power can help the grid and the individual electricity power markets to maintain their frequency (Hz) requirements.

Though these contracts seem fair at surface level, the key element to note is the utilization related payment. If we have to build more storage than is needed on the average day, we must also build extra storage for days with peak energy demand. 

Since this extra storage may not be utilized frequently, storage contracts should integrate a minimum payment scheme that gives a base payment to the operator no matter what the utilization rate of the battery is, and therefore ensure the operator is compensated appropriately for their investment. Unlike the SCE contract, there might be no penalty for failing to meet utilization requirements (unless there was a mechanical failure) and the storage operator could earn a bonus for high utilization. This would be a way to incentivize enough storage to be built to continue supporting the ongoing energy transition.  

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In recent years, the falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other competing storage technologies—such as pumped hydro, compressed air, and reversible fuel-cells—we can’t ignore the need to create smart ways to pay for their installation and operation in the face of changing demand.

In a future with a renewable grid, energy storage will be used for more than just load balancing the grid from the day-to-day needs caused by our variable energy sources and different levels of customer demand. It could be required to potentially store large quantities of energy for periods of weeks to months to facilitate energy consumption during peak periods such as winter heating months. To enable the proliferation of renewable power, long-term energy storage will become just as important a service as short-term power supply.

Due to the fickle nature of energy demand and supply, these storage assets may or may not be used on any given day. Storage providers will need to be incentivized to build storage and be paid for it even if the resource is underutilized. If they aren’t, they will be unlikely to build enough storage capacity and the grid operator may be forced into the use of expensive, short-term peak power (with higher prices that get passed on to customers).

Bloomberg’s BNEF reports that the amount of deployed energy storage will multiply by 122 times, from “9GW/17GWh deployed as of 2018 to 1,095GW/2,850GWh by 2040” and this growth will be primarily driven by a halving of the cost of batteries by 2030. Moreover, there are many energy storage projects being built in conjunction with renewable power developments due to these falling costs and the ability to balance intermittency. Smart contracting for storage could help accelerate this deployment of utility scale storage assets. 

We reviewed a public request for proposal contract that was made available a few years ago by Southern California Edison (SCE), and found that this contract included three sources of income for an energy storage operator:

  1. An ongoing payment for capacity of energy (watt-hours) provided
  2. Compensation for operations and maintenance cost of the storage unit
  3. A multiplier to the payment, if the monthly utilization of the unit met certain requirements

Conversations with players in the battery storage space (such as AMS, which develops artificial intelligence to price and dispatch energy storage) have indicated that batteries also provide ancillary services like regulating the frequency of power. Tiny injections of stored power can help the grid and the individual electricity power markets to maintain their frequency (Hz) requirements.

Though these contracts seem fair at surface level, the key element to note is the utilization related payment. If we have to build more storage than is needed on the average day, we must also build extra storage for days with peak energy demand. 

Since this extra storage may not be utilized frequently, storage contracts should integrate a minimum payment scheme that gives a base payment to the operator no matter what the utilization rate of the battery is, and therefore ensure the operator is compensated appropriately for their investment. Unlike the SCE contract, there might be no penalty for failing to meet utilization requirements (unless there was a mechanical failure) and the storage operator could earn a bonus for high utilization. This would be a way to incentivize enough storage to be built to continue supporting the ongoing energy transition.  

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is currently pursuing a master's in business administration from the Wharton School amd a master's in international studies from the Lauder Institute.

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is currently pursuing a master's in business administration from the Wharton School amd a master's in international studies from the Lauder Institute.

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The falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other storage technologies, there is a need to create smart ways to pay for their installation and operation.

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The falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other storage technologies, there is a need to create smart ways to pay for their installation and operation.

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New energy storage technologies are increasingly connecting to the electric grid, but it’s not clear that current rules in electricity markets are designed to help storage and new distributed energy resources (DER) participate as fully as other generation.  The federal government’s electricity market regulator, FERC, has issued a notice with proposed rules that could create new opportunities for deployment and investment but also raise questions for stakeholders to address.

Guest Ken Kulak is a partner at the law firm of Morgan Lewis, where he advises clients on energy regulation and complex energy transactions. He has worked on a wide variety of renewable energy projects and helps clients navigate the legal issues associated with the development, purchase, sale and financing of renewable energy in evolving regulatory frameworks.

 

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New energy storage technologies are increasingly connecting to the electric grid, but it’s not clear that current rules in electricity markets are designed to help storage and new distributed energy resources (DER) participate as fully as other generation.  The federal government’s electricity market regulator, FERC, has issued a notice with proposed rules that could create new opportunities for deployment and investment but also raise questions for stakeholders to address.

Guest Ken Kulak is a partner at the law firm of Morgan Lewis, where he advises clients on energy regulation and complex energy transactions. He has worked on a wide variety of renewable energy projects and helps clients navigate the legal issues associated with the development, purchase, sale and financing of renewable energy in evolving regulatory frameworks.

 

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Energy storage in electricity markets is on the rise, and the Federal Energy Regulatory Commission (FERC) is weighing in with new rules that could change deployment of storage and distributed energy resources across the country.

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Energy storage in electricity markets is on the rise, and the Federal Energy Regulatory Commission (FERC) is weighing in with new rules that could change deployment of storage and distributed energy resources across the country.

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At the end of March, Florida Power and Light (FPL) announced that the company will build the world’s largest battery storage system to complement its existing solar power plant, to begin operations in late 2021. The system will be a 409-MW/900-MWh battery storage facility, around four times the storage capacity of the world’s current largest battery system at the Hornsdale Power Reserve in Australia.

The U.S. energy storage market has seen a major expansion in recent years— the market nearly doubled in 2018 and is expected to double again in 2019. Large utility-scale projects like FPL’s, signal that the industry is maturing and solving operational and financial challenges that previously hindered large-scale deployments.

The Kleinman Center recently invited a panel moderated by Wharton Professor Arthur Van Benthem to speak to the trends and challenges of the energy storage sector. The panelists included:

  • Ravi Manghani: Director of Energy Storage, Wood Mackenzie Power & Renewables
  • Arjun Prasad Ramadevanahalli: Associate, Morgan Lewis Law Firm
  • Paul Reed: Director of Business Development & Account Management, Viridity Energy

Below are the key takeaways to share from this panel:

  • 10x growth: Energy storage is poised for a rapid acceleration of installed capacity, projected to grow more than ten times in the next 5 to 7 years. The growth is driven by several technology and market dynamics, including:
    • High utility demand charges– for commercial and industrial customers, peak demand charges (highest energy consumption rate at any time during the billing period) can compose 40 to 60% of their total utility bill. Storage is a key solution for reducing peak demand.
    • Net energy metering shifts– utilities are pushing back against buying excess energy generated from renewable sources at retail prices; thus, owners of renewable generators are better off storing the energy to be used at a different time than sell the energy back to the grid.
    • Declining system prices– the cost of lithium-ion batteries has decreased 85% between 2014 to 2018 and is continuing to decrease. The cost curve is similar to the ones from the solar industry in recent years.
       
  • Order 841: In a big step forward, the Federal Energy Regulatory Commission (FERC) passed Order 841 this year on February 28 as a mandate to Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to establish market rules for energy storage. These rules should allow storage resources to participate in the market as both a buyer and seller, enabling storage to compete against traditional fossil fuel burning resources such as peaking plants. Many regulatory issues are pending, including understanding the impact to the distribution grid from bidirectional flow, procedures to connect the devices to the grid, and transmission access charges.
     
  • The Swiss army knife of the energy industry: Storage is often called the Swiss army knife of the industry because it can be flexed to perform different functions throughout the value chain, depending on the design and location.
    • Generation– renewables integration/firming (e.g. reserves solar energy, for use at night), microgrids, instantaneous power output
    • Transmission & Distribution (T&D)– frequency regulation, T&D asset deferral, congestion relief
    • Consumption– peak shaving, demand management, back-up supply
       
  • How storage is monetized: Given the flexibility in design and application, storage resources can be monetized through different models at scale.
    • Contracted revenue– a buyer pays the storage owner a fixed charge for its right to utilize the battery’s capacity and charging/discharging
    • Merchant revenue – selling energy from the storage resource back to the wholesale electricity market
    • License– provide ‘energy-storage-as-a-service’ or demand management services to customers

As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. Storage, especially when complemented with renewables, is proving to be the innovation that can address this need. Much progress has been made and today’s market dynamics and new policy structure will continue to push the storage market forward.

[summary] => [format] => full_html [safe_value] =>

At the end of March, Florida Power and Light (FPL) announced that the company will build the world’s largest battery storage system to complement its existing solar power plant, to begin operations in late 2021. The system will be a 409-MW/900-MWh battery storage facility, around four times the storage capacity of the world’s current largest battery system at the Hornsdale Power Reserve in Australia.

The U.S. energy storage market has seen a major expansion in recent years— the market nearly doubled in 2018 and is expected to double again in 2019. Large utility-scale projects like FPL’s, signal that the industry is maturing and solving operational and financial challenges that previously hindered large-scale deployments.

The Kleinman Center recently invited a panel moderated by Wharton Professor Arthur Van Benthem to speak to the trends and challenges of the energy storage sector. The panelists included:

  • Ravi Manghani: Director of Energy Storage, Wood Mackenzie Power & Renewables
  • Arjun Prasad Ramadevanahalli: Associate, Morgan Lewis Law Firm
  • Paul Reed: Director of Business Development & Account Management, Viridity Energy

Below are the key takeaways to share from this panel:

  • 10x growth: Energy storage is poised for a rapid acceleration of installed capacity, projected to grow more than ten times in the next 5 to 7 years. The growth is driven by several technology and market dynamics, including:
    • High utility demand charges– for commercial and industrial customers, peak demand charges (highest energy consumption rate at any time during the billing period) can compose 40 to 60% of their total utility bill. Storage is a key solution for reducing peak demand.
    • Net energy metering shifts– utilities are pushing back against buying excess energy generated from renewable sources at retail prices; thus, owners of renewable generators are better off storing the energy to be used at a different time than sell the energy back to the grid.
    • Declining system prices– the cost of lithium-ion batteries has decreased 85% between 2014 to 2018 and is continuing to decrease. The cost curve is similar to the ones from the solar industry in recent years.
       
  • Order 841: In a big step forward, the Federal Energy Regulatory Commission (FERC) passed Order 841 this year on February 28 as a mandate to Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to establish market rules for energy storage. These rules should allow storage resources to participate in the market as both a buyer and seller, enabling storage to compete against traditional fossil fuel burning resources such as peaking plants. Many regulatory issues are pending, including understanding the impact to the distribution grid from bidirectional flow, procedures to connect the devices to the grid, and transmission access charges.
     
  • The Swiss army knife of the energy industry: Storage is often called the Swiss army knife of the industry because it can be flexed to perform different functions throughout the value chain, depending on the design and location.
    • Generation– renewables integration/firming (e.g. reserves solar energy, for use at night), microgrids, instantaneous power output
    • Transmission & Distribution (T&D)– frequency regulation, T&D asset deferral, congestion relief
    • Consumption– peak shaving, demand management, back-up supply
       
  • How storage is monetized: Given the flexibility in design and application, storage resources can be monetized through different models at scale.
    • Contracted revenue– a buyer pays the storage owner a fixed charge for its right to utilize the battery’s capacity and charging/discharging
    • Merchant revenue – selling energy from the storage resource back to the wholesale electricity market
    • License– provide ‘energy-storage-as-a-service’ or demand management services to customers

As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. Storage, especially when complemented with renewables, is proving to be the innovation that can address this need. Much progress has been made and today’s market dynamics and new policy structure will continue to push the storage market forward.

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As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. A recent panel explored the state of today’s energy storage.

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As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. A recent panel explored the state of today’s energy storage.

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Executive Summary

To maintain reliability, the electric power grid needs to always balance electrical supply with demand. While grid operators pay close attention to forecasting load (i.e. demand) and scheduling generation (i.e. planning for dispatch of generation supply) ahead of time, there will be short-term errors in load forecasts or unexpected fluctuations of power plant output. Because demand and supply need to be balanced almost immediately, these sudden changes necessitate instantaneous adjustments within the timeframe of seconds to minutes. So grid operators rely upon “frequency regulation” resources to correct for these small mismatches between supply and demand. Frequency regulation resources are paid to automatically adjust output according to the operator’s signal in order to respond to these short-term fluctuations.

Traditionally, centralized power plants (like hydropower, steam generators, or combustion turbines) have provided frequency regulation services. Following recent technological and cost improvements, energy storage technologies (including batteries and flywheels) have begun to provide frequency regulation to grid systems as well. In 2012, the PJM Interconnection (PJM)—the regional transmission organization that operates the electricity grid across 13 mid-Atlantic states and D.C.—divided its frequency regulation market into slow and fast components. Fast response resources included energy storage that could absorb or release power very quickly, and more traditional resources like natural gas-fired power plants that could ramp power up and down with a slight delay.

The fast frequency regulation product was initially designed to require resources to provide zero energy on net when averaged over 15 minute periods. This concept, where the cumulative energy input equals the cumulative energy output, is called “energy neutrality.” This design enhanced the ability of energy storage resources to respond to the grid operator’s frequency regulation signals by ensuring the storage resource had available capacity to offer. As a result of this design, a lot of energy storage investment occurred in the PJM region. As of August 2016, PJM accounted for 46 percent of the rated power (MW) of grid-connected battery projects operational in the United States (DOE Office of Electricity Delivery & Energy Reliability 2016). Recently, other regions such as California have seen substantial energy storage deployment.

Frequency regulation has played a large role in energy storage commercialization, and will continue to play a role. But how large a role depends on changes to the design of PJM’s frequency regulation market. PJM embarked on these changes in an effort to correct observed problems in the market. Specifically, some energy storage resources at some instances would be pulling power from the grid in an effort to achieve energy neutrality at the precise time the grid operator needed resources to be injecting power, and vice versa.

Starting in 2015, PJM embarked on a series of changes to its frequency regulation market to correct for observed issues, and more changes are being proposed. Changes implemented to date have resulted in reduced growth rates of energy storage resources in the PJM footprint. The energy storage industry perceives these market changes to be unduly unfair, and is challenging PJM through two complaints before the Federal Energy Regulatory Commission (FERC).

The underlying technological issue facing PJM’s frequency regulation system is that advanced energy storage units can provide quick and accurate responses in a short timescale, but cannot sustain this output for a long time. Consequently, PJM, the energy storage industry, and the Federal Energy Regulatory Commission (FERC) need to resolve a significant market design challenge: How should the market place different technologies on a competitive playing field when their technical characteristics differ fundamentally, all while protecting system reliability? 

This report will focus on the technological and economic aspects of PJM’s frequency regulation market design, while avoiding commenting on the legal nuances of the ongoing complaints. This report first discusses the importance of frequency regulation in relation to compliance with reliability standards. Then it provides an overview of how two central market design dimensions of the PJM frequency regulation system were created: the signal construction and the valuation system for these two different signal types. This article looks at the recent market design changes and seeks to examine their impacts on system reliability as well as energy storage providers. Finally, the article considers the future direction of how energy storage interacts with frequency regulation needs.

[summary] => [format] => full_html [safe_value] =>

Executive Summary

To maintain reliability, the electric power grid needs to always balance electrical supply with demand. While grid operators pay close attention to forecasting load (i.e. demand) and scheduling generation (i.e. planning for dispatch of generation supply) ahead of time, there will be short-term errors in load forecasts or unexpected fluctuations of power plant output. Because demand and supply need to be balanced almost immediately, these sudden changes necessitate instantaneous adjustments within the timeframe of seconds to minutes. So grid operators rely upon “frequency regulation” resources to correct for these small mismatches between supply and demand. Frequency regulation resources are paid to automatically adjust output according to the operator’s signal in order to respond to these short-term fluctuations.

Traditionally, centralized power plants (like hydropower, steam generators, or combustion turbines) have provided frequency regulation services. Following recent technological and cost improvements, energy storage technologies (including batteries and flywheels) have begun to provide frequency regulation to grid systems as well. In 2012, the PJM Interconnection (PJM)—the regional transmission organization that operates the electricity grid across 13 mid-Atlantic states and D.C.—divided its frequency regulation market into slow and fast components. Fast response resources included energy storage that could absorb or release power very quickly, and more traditional resources like natural gas-fired power plants that could ramp power up and down with a slight delay.

The fast frequency regulation product was initially designed to require resources to provide zero energy on net when averaged over 15 minute periods. This concept, where the cumulative energy input equals the cumulative energy output, is called “energy neutrality.” This design enhanced the ability of energy storage resources to respond to the grid operator’s frequency regulation signals by ensuring the storage resource had available capacity to offer. As a result of this design, a lot of energy storage investment occurred in the PJM region. As of August 2016, PJM accounted for 46 percent of the rated power (MW) of grid-connected battery projects operational in the United States (DOE Office of Electricity Delivery & Energy Reliability 2016). Recently, other regions such as California have seen substantial energy storage deployment.

Frequency regulation has played a large role in energy storage commercialization, and will continue to play a role. But how large a role depends on changes to the design of PJM’s frequency regulation market. PJM embarked on these changes in an effort to correct observed problems in the market. Specifically, some energy storage resources at some instances would be pulling power from the grid in an effort to achieve energy neutrality at the precise time the grid operator needed resources to be injecting power, and vice versa.

Starting in 2015, PJM embarked on a series of changes to its frequency regulation market to correct for observed issues, and more changes are being proposed. Changes implemented to date have resulted in reduced growth rates of energy storage resources in the PJM footprint. The energy storage industry perceives these market changes to be unduly unfair, and is challenging PJM through two complaints before the Federal Energy Regulatory Commission (FERC).

The underlying technological issue facing PJM’s frequency regulation system is that advanced energy storage units can provide quick and accurate responses in a short timescale, but cannot sustain this output for a long time. Consequently, PJM, the energy storage industry, and the Federal Energy Regulatory Commission (FERC) need to resolve a significant market design challenge: How should the market place different technologies on a competitive playing field when their technical characteristics differ fundamentally, all while protecting system reliability? 

This report will focus on the technological and economic aspects of PJM’s frequency regulation market design, while avoiding commenting on the legal nuances of the ongoing complaints. This report first discusses the importance of frequency regulation in relation to compliance with reliability standards. Then it provides an overview of how two central market design dimensions of the PJM frequency regulation system were created: the signal construction and the valuation system for these two different signal types. This article looks at the recent market design changes and seeks to examine their impacts on system reliability as well as energy storage providers. Finally, the article considers the future direction of how energy storage interacts with frequency regulation needs.

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The author wishes to acknowledge helpful comments from a reviewer of an earlier draft. Any remaining errors are the responsibility of the author alone.

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The author wishes to acknowledge helpful comments from a reviewer of an earlier draft. Any remaining errors are the responsibility of the author alone.

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Room filled with multiple batteries
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In recent years, the falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other competing storage technologies—such as pumped hydro, compressed air, and reversible fuel-cells—we can’t ignore the need to create smart ways to pay for their installation and operation in the face of changing demand.

In a future with a renewable grid, energy storage will be used for more than just load balancing the grid from the day-to-day needs caused by our variable energy sources and different levels of customer demand. It could be required to potentially store large quantities of energy for periods of weeks to months to facilitate energy consumption during peak periods such as winter heating months. To enable the proliferation of renewable power, long-term energy storage will become just as important a service as short-term power supply.

Due to the fickle nature of energy demand and supply, these storage assets may or may not be used on any given day. Storage providers will need to be incentivized to build storage and be paid for it even if the resource is underutilized. If they aren’t, they will be unlikely to build enough storage capacity and the grid operator may be forced into the use of expensive, short-term peak power (with higher prices that get passed on to customers).

Bloomberg’s BNEF reports that the amount of deployed energy storage will multiply by 122 times, from “9GW/17GWh deployed as of 2018 to 1,095GW/2,850GWh by 2040” and this growth will be primarily driven by a halving of the cost of batteries by 2030. Moreover, there are many energy storage projects being built in conjunction with renewable power developments due to these falling costs and the ability to balance intermittency. Smart contracting for storage could help accelerate this deployment of utility scale storage assets. 

We reviewed a public request for proposal contract that was made available a few years ago by Southern California Edison (SCE), and found that this contract included three sources of income for an energy storage operator:

  1. An ongoing payment for capacity of energy (watt-hours) provided
  2. Compensation for operations and maintenance cost of the storage unit
  3. A multiplier to the payment, if the monthly utilization of the unit met certain requirements

Conversations with players in the battery storage space (such as AMS, which develops artificial intelligence to price and dispatch energy storage) have indicated that batteries also provide ancillary services like regulating the frequency of power. Tiny injections of stored power can help the grid and the individual electricity power markets to maintain their frequency (Hz) requirements.

Though these contracts seem fair at surface level, the key element to note is the utilization related payment. If we have to build more storage than is needed on the average day, we must also build extra storage for days with peak energy demand. 

Since this extra storage may not be utilized frequently, storage contracts should integrate a minimum payment scheme that gives a base payment to the operator no matter what the utilization rate of the battery is, and therefore ensure the operator is compensated appropriately for their investment. Unlike the SCE contract, there might be no penalty for failing to meet utilization requirements (unless there was a mechanical failure) and the storage operator could earn a bonus for high utilization. This would be a way to incentivize enough storage to be built to continue supporting the ongoing energy transition.  

[summary] => [format] => full_html [safe_value] =>

In recent years, the falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other competing storage technologies—such as pumped hydro, compressed air, and reversible fuel-cells—we can’t ignore the need to create smart ways to pay for their installation and operation in the face of changing demand.

In a future with a renewable grid, energy storage will be used for more than just load balancing the grid from the day-to-day needs caused by our variable energy sources and different levels of customer demand. It could be required to potentially store large quantities of energy for periods of weeks to months to facilitate energy consumption during peak periods such as winter heating months. To enable the proliferation of renewable power, long-term energy storage will become just as important a service as short-term power supply.

Due to the fickle nature of energy demand and supply, these storage assets may or may not be used on any given day. Storage providers will need to be incentivized to build storage and be paid for it even if the resource is underutilized. If they aren’t, they will be unlikely to build enough storage capacity and the grid operator may be forced into the use of expensive, short-term peak power (with higher prices that get passed on to customers).

Bloomberg’s BNEF reports that the amount of deployed energy storage will multiply by 122 times, from “9GW/17GWh deployed as of 2018 to 1,095GW/2,850GWh by 2040” and this growth will be primarily driven by a halving of the cost of batteries by 2030. Moreover, there are many energy storage projects being built in conjunction with renewable power developments due to these falling costs and the ability to balance intermittency. Smart contracting for storage could help accelerate this deployment of utility scale storage assets. 

We reviewed a public request for proposal contract that was made available a few years ago by Southern California Edison (SCE), and found that this contract included three sources of income for an energy storage operator:

  1. An ongoing payment for capacity of energy (watt-hours) provided
  2. Compensation for operations and maintenance cost of the storage unit
  3. A multiplier to the payment, if the monthly utilization of the unit met certain requirements

Conversations with players in the battery storage space (such as AMS, which develops artificial intelligence to price and dispatch energy storage) have indicated that batteries also provide ancillary services like regulating the frequency of power. Tiny injections of stored power can help the grid and the individual electricity power markets to maintain their frequency (Hz) requirements.

Though these contracts seem fair at surface level, the key element to note is the utilization related payment. If we have to build more storage than is needed on the average day, we must also build extra storage for days with peak energy demand. 

Since this extra storage may not be utilized frequently, storage contracts should integrate a minimum payment scheme that gives a base payment to the operator no matter what the utilization rate of the battery is, and therefore ensure the operator is compensated appropriately for their investment. Unlike the SCE contract, there might be no penalty for failing to meet utilization requirements (unless there was a mechanical failure) and the storage operator could earn a bonus for high utilization. This would be a way to incentivize enough storage to be built to continue supporting the ongoing energy transition.  

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is currently pursuing a master's in business administration from the Wharton School amd a master's in international studies from the Lauder Institute.

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is currently pursuing a master's in business administration from the Wharton School amd a master's in international studies from the Lauder Institute.

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The falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other storage technologies, there is a need to create smart ways to pay for their installation and operation.

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The falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other storage technologies, there is a need to create smart ways to pay for their installation and operation.

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New energy storage technologies are increasingly connecting to the electric grid, but it’s not clear that current rules in electricity markets are designed to help storage and new distributed energy resources (DER) participate as fully as other generation.  The federal government’s electricity market regulator, FERC, has issued a notice with proposed rules that could create new opportunities for deployment and investment but also raise questions for stakeholders to address.

Guest Ken Kulak is a partner at the law firm of Morgan Lewis, where he advises clients on energy regulation and complex energy transactions. He has worked on a wide variety of renewable energy projects and helps clients navigate the legal issues associated with the development, purchase, sale and financing of renewable energy in evolving regulatory frameworks.

 

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New energy storage technologies are increasingly connecting to the electric grid, but it’s not clear that current rules in electricity markets are designed to help storage and new distributed energy resources (DER) participate as fully as other generation.  The federal government’s electricity market regulator, FERC, has issued a notice with proposed rules that could create new opportunities for deployment and investment but also raise questions for stakeholders to address.

Guest Ken Kulak is a partner at the law firm of Morgan Lewis, where he advises clients on energy regulation and complex energy transactions. He has worked on a wide variety of renewable energy projects and helps clients navigate the legal issues associated with the development, purchase, sale and financing of renewable energy in evolving regulatory frameworks.

 

[safe_summary] => ) ) ) [field_date] => Array ( [und] => Array ( [0] => Array ( [value] => 2017-01-30 00:00:00 [timezone] => America/New_York [timezone_db] => America/New_York [date_type] => datetime ) ) ) [field_episode] => Array ( [und] => Array ( [0] => Array ( [value] => EPN05 [format] => [safe_value] => EPN05 ) ) ) [field_episode_image] => Array ( [und] => Array ( [0] => Array ( [fid] => 1614 [uid] => 10 [filename] => Kulak EPN square.jpg [uri] => public://epn_image/Kulak EPN square.jpg [filemime] => image/jpeg [filesize] => 179157 [status] => 1 [timestamp] => 1485839444 [focus_rect] => [crop_rect] => [rdf_mapping] => Array ( ) [alt] => [title] => [width] => 500 [height] => 500 ) ) ) [field_player] => Array ( [und] => Array ( [0] => Array ( [value] => [format] => no_editor [safe_value] => ) ) ) [field_teaser] => Array ( [und] => Array ( [0] => Array ( [value] =>

Energy storage in electricity markets is on the rise, and the Federal Energy Regulatory Commission (FERC) is weighing in with new rules that could change deployment of storage and distributed energy resources across the country.

[format] => full_html [safe_value] =>

Energy storage in electricity markets is on the rise, and the Federal Energy Regulatory Commission (FERC) is weighing in with new rules that could change deployment of storage and distributed energy resources across the country.

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At the end of March, Florida Power and Light (FPL) announced that the company will build the world’s largest battery storage system to complement its existing solar power plant, to begin operations in late 2021. The system will be a 409-MW/900-MWh battery storage facility, around four times the storage capacity of the world’s current largest battery system at the Hornsdale Power Reserve in Australia.

The U.S. energy storage market has seen a major expansion in recent years— the market nearly doubled in 2018 and is expected to double again in 2019. Large utility-scale projects like FPL’s, signal that the industry is maturing and solving operational and financial challenges that previously hindered large-scale deployments.

The Kleinman Center recently invited a panel moderated by Wharton Professor Arthur Van Benthem to speak to the trends and challenges of the energy storage sector. The panelists included:

  • Ravi Manghani: Director of Energy Storage, Wood Mackenzie Power & Renewables
  • Arjun Prasad Ramadevanahalli: Associate, Morgan Lewis Law Firm
  • Paul Reed: Director of Business Development & Account Management, Viridity Energy

Below are the key takeaways to share from this panel:

  • 10x growth: Energy storage is poised for a rapid acceleration of installed capacity, projected to grow more than ten times in the next 5 to 7 years. The growth is driven by several technology and market dynamics, including:
    • High utility demand charges– for commercial and industrial customers, peak demand charges (highest energy consumption rate at any time during the billing period) can compose 40 to 60% of their total utility bill. Storage is a key solution for reducing peak demand.
    • Net energy metering shifts– utilities are pushing back against buying excess energy generated from renewable sources at retail prices; thus, owners of renewable generators are better off storing the energy to be used at a different time than sell the energy back to the grid.
    • Declining system prices– the cost of lithium-ion batteries has decreased 85% between 2014 to 2018 and is continuing to decrease. The cost curve is similar to the ones from the solar industry in recent years.
       
  • Order 841: In a big step forward, the Federal Energy Regulatory Commission (FERC) passed Order 841 this year on February 28 as a mandate to Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to establish market rules for energy storage. These rules should allow storage resources to participate in the market as both a buyer and seller, enabling storage to compete against traditional fossil fuel burning resources such as peaking plants. Many regulatory issues are pending, including understanding the impact to the distribution grid from bidirectional flow, procedures to connect the devices to the grid, and transmission access charges.
     
  • The Swiss army knife of the energy industry: Storage is often called the Swiss army knife of the industry because it can be flexed to perform different functions throughout the value chain, depending on the design and location.
    • Generation– renewables integration/firming (e.g. reserves solar energy, for use at night), microgrids, instantaneous power output
    • Transmission & Distribution (T&D)– frequency regulation, T&D asset deferral, congestion relief
    • Consumption– peak shaving, demand management, back-up supply
       
  • How storage is monetized: Given the flexibility in design and application, storage resources can be monetized through different models at scale.
    • Contracted revenue– a buyer pays the storage owner a fixed charge for its right to utilize the battery’s capacity and charging/discharging
    • Merchant revenue – selling energy from the storage resource back to the wholesale electricity market
    • License– provide ‘energy-storage-as-a-service’ or demand management services to customers

As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. Storage, especially when complemented with renewables, is proving to be the innovation that can address this need. Much progress has been made and today’s market dynamics and new policy structure will continue to push the storage market forward.

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At the end of March, Florida Power and Light (FPL) announced that the company will build the world’s largest battery storage system to complement its existing solar power plant, to begin operations in late 2021. The system will be a 409-MW/900-MWh battery storage facility, around four times the storage capacity of the world’s current largest battery system at the Hornsdale Power Reserve in Australia.

The U.S. energy storage market has seen a major expansion in recent years— the market nearly doubled in 2018 and is expected to double again in 2019. Large utility-scale projects like FPL’s, signal that the industry is maturing and solving operational and financial challenges that previously hindered large-scale deployments.

The Kleinman Center recently invited a panel moderated by Wharton Professor Arthur Van Benthem to speak to the trends and challenges of the energy storage sector. The panelists included:

  • Ravi Manghani: Director of Energy Storage, Wood Mackenzie Power & Renewables
  • Arjun Prasad Ramadevanahalli: Associate, Morgan Lewis Law Firm
  • Paul Reed: Director of Business Development & Account Management, Viridity Energy

Below are the key takeaways to share from this panel:

  • 10x growth: Energy storage is poised for a rapid acceleration of installed capacity, projected to grow more than ten times in the next 5 to 7 years. The growth is driven by several technology and market dynamics, including:
    • High utility demand charges– for commercial and industrial customers, peak demand charges (highest energy consumption rate at any time during the billing period) can compose 40 to 60% of their total utility bill. Storage is a key solution for reducing peak demand.
    • Net energy metering shifts– utilities are pushing back against buying excess energy generated from renewable sources at retail prices; thus, owners of renewable generators are better off storing the energy to be used at a different time than sell the energy back to the grid.
    • Declining system prices– the cost of lithium-ion batteries has decreased 85% between 2014 to 2018 and is continuing to decrease. The cost curve is similar to the ones from the solar industry in recent years.
       
  • Order 841: In a big step forward, the Federal Energy Regulatory Commission (FERC) passed Order 841 this year on February 28 as a mandate to Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to establish market rules for energy storage. These rules should allow storage resources to participate in the market as both a buyer and seller, enabling storage to compete against traditional fossil fuel burning resources such as peaking plants. Many regulatory issues are pending, including understanding the impact to the distribution grid from bidirectional flow, procedures to connect the devices to the grid, and transmission access charges.
     
  • The Swiss army knife of the energy industry: Storage is often called the Swiss army knife of the industry because it can be flexed to perform different functions throughout the value chain, depending on the design and location.
    • Generation– renewables integration/firming (e.g. reserves solar energy, for use at night), microgrids, instantaneous power output
    • Transmission & Distribution (T&D)– frequency regulation, T&D asset deferral, congestion relief
    • Consumption– peak shaving, demand management, back-up supply
       
  • How storage is monetized: Given the flexibility in design and application, storage resources can be monetized through different models at scale.
    • Contracted revenue– a buyer pays the storage owner a fixed charge for its right to utilize the battery’s capacity and charging/discharging
    • Merchant revenue – selling energy from the storage resource back to the wholesale electricity market
    • License– provide ‘energy-storage-as-a-service’ or demand management services to customers

As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. Storage, especially when complemented with renewables, is proving to be the innovation that can address this need. Much progress has been made and today’s market dynamics and new policy structure will continue to push the storage market forward.

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As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. A recent panel explored the state of today’s energy storage.

[format] => full_html [safe_value] =>

As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. A recent panel explored the state of today’s energy storage.

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Executive Summary

To maintain reliability, the electric power grid needs to always balance electrical supply with demand. While grid operators pay close attention to forecasting load (i.e. demand) and scheduling generation (i.e. planning for dispatch of generation supply) ahead of time, there will be short-term errors in load forecasts or unexpected fluctuations of power plant output. Because demand and supply need to be balanced almost immediately, these sudden changes necessitate instantaneous adjustments within the timeframe of seconds to minutes. So grid operators rely upon “frequency regulation” resources to correct for these small mismatches between supply and demand. Frequency regulation resources are paid to automatically adjust output according to the operator’s signal in order to respond to these short-term fluctuations.

Traditionally, centralized power plants (like hydropower, steam generators, or combustion turbines) have provided frequency regulation services. Following recent technological and cost improvements, energy storage technologies (including batteries and flywheels) have begun to provide frequency regulation to grid systems as well. In 2012, the PJM Interconnection (PJM)—the regional transmission organization that operates the electricity grid across 13 mid-Atlantic states and D.C.—divided its frequency regulation market into slow and fast components. Fast response resources included energy storage that could absorb or release power very quickly, and more traditional resources like natural gas-fired power plants that could ramp power up and down with a slight delay.

The fast frequency regulation product was initially designed to require resources to provide zero energy on net when averaged over 15 minute periods. This concept, where the cumulative energy input equals the cumulative energy output, is called “energy neutrality.” This design enhanced the ability of energy storage resources to respond to the grid operator’s frequency regulation signals by ensuring the storage resource had available capacity to offer. As a result of this design, a lot of energy storage investment occurred in the PJM region. As of August 2016, PJM accounted for 46 percent of the rated power (MW) of grid-connected battery projects operational in the United States (DOE Office of Electricity Delivery & Energy Reliability 2016). Recently, other regions such as California have seen substantial energy storage deployment.

Frequency regulation has played a large role in energy storage commercialization, and will continue to play a role. But how large a role depends on changes to the design of PJM’s frequency regulation market. PJM embarked on these changes in an effort to correct observed problems in the market. Specifically, some energy storage resources at some instances would be pulling power from the grid in an effort to achieve energy neutrality at the precise time the grid operator needed resources to be injecting power, and vice versa.

Starting in 2015, PJM embarked on a series of changes to its frequency regulation market to correct for observed issues, and more changes are being proposed. Changes implemented to date have resulted in reduced growth rates of energy storage resources in the PJM footprint. The energy storage industry perceives these market changes to be unduly unfair, and is challenging PJM through two complaints before the Federal Energy Regulatory Commission (FERC).

The underlying technological issue facing PJM’s frequency regulation system is that advanced energy storage units can provide quick and accurate responses in a short timescale, but cannot sustain this output for a long time. Consequently, PJM, the energy storage industry, and the Federal Energy Regulatory Commission (FERC) need to resolve a significant market design challenge: How should the market place different technologies on a competitive playing field when their technical characteristics differ fundamentally, all while protecting system reliability? 

This report will focus on the technological and economic aspects of PJM’s frequency regulation market design, while avoiding commenting on the legal nuances of the ongoing complaints. This report first discusses the importance of frequency regulation in relation to compliance with reliability standards. Then it provides an overview of how two central market design dimensions of the PJM frequency regulation system were created: the signal construction and the valuation system for these two different signal types. This article looks at the recent market design changes and seeks to examine their impacts on system reliability as well as energy storage providers. Finally, the article considers the future direction of how energy storage interacts with frequency regulation needs.

[summary] => [format] => full_html [safe_value] =>

Executive Summary

To maintain reliability, the electric power grid needs to always balance electrical supply with demand. While grid operators pay close attention to forecasting load (i.e. demand) and scheduling generation (i.e. planning for dispatch of generation supply) ahead of time, there will be short-term errors in load forecasts or unexpected fluctuations of power plant output. Because demand and supply need to be balanced almost immediately, these sudden changes necessitate instantaneous adjustments within the timeframe of seconds to minutes. So grid operators rely upon “frequency regulation” resources to correct for these small mismatches between supply and demand. Frequency regulation resources are paid to automatically adjust output according to the operator’s signal in order to respond to these short-term fluctuations.

Traditionally, centralized power plants (like hydropower, steam generators, or combustion turbines) have provided frequency regulation services. Following recent technological and cost improvements, energy storage technologies (including batteries and flywheels) have begun to provide frequency regulation to grid systems as well. In 2012, the PJM Interconnection (PJM)—the regional transmission organization that operates the electricity grid across 13 mid-Atlantic states and D.C.—divided its frequency regulation market into slow and fast components. Fast response resources included energy storage that could absorb or release power very quickly, and more traditional resources like natural gas-fired power plants that could ramp power up and down with a slight delay.

The fast frequency regulation product was initially designed to require resources to provide zero energy on net when averaged over 15 minute periods. This concept, where the cumulative energy input equals the cumulative energy output, is called “energy neutrality.” This design enhanced the ability of energy storage resources to respond to the grid operator’s frequency regulation signals by ensuring the storage resource had available capacity to offer. As a result of this design, a lot of energy storage investment occurred in the PJM region. As of August 2016, PJM accounted for 46 percent of the rated power (MW) of grid-connected battery projects operational in the United States (DOE Office of Electricity Delivery & Energy Reliability 2016). Recently, other regions such as California have seen substantial energy storage deployment.

Frequency regulation has played a large role in energy storage commercialization, and will continue to play a role. But how large a role depends on changes to the design of PJM’s frequency regulation market. PJM embarked on these changes in an effort to correct observed problems in the market. Specifically, some energy storage resources at some instances would be pulling power from the grid in an effort to achieve energy neutrality at the precise time the grid operator needed resources to be injecting power, and vice versa.

Starting in 2015, PJM embarked on a series of changes to its frequency regulation market to correct for observed issues, and more changes are being proposed. Changes implemented to date have resulted in reduced growth rates of energy storage resources in the PJM footprint. The energy storage industry perceives these market changes to be unduly unfair, and is challenging PJM through two complaints before the Federal Energy Regulatory Commission (FERC).

The underlying technological issue facing PJM’s frequency regulation system is that advanced energy storage units can provide quick and accurate responses in a short timescale, but cannot sustain this output for a long time. Consequently, PJM, the energy storage industry, and the Federal Energy Regulatory Commission (FERC) need to resolve a significant market design challenge: How should the market place different technologies on a competitive playing field when their technical characteristics differ fundamentally, all while protecting system reliability? 

This report will focus on the technological and economic aspects of PJM’s frequency regulation market design, while avoiding commenting on the legal nuances of the ongoing complaints. This report first discusses the importance of frequency regulation in relation to compliance with reliability standards. Then it provides an overview of how two central market design dimensions of the PJM frequency regulation system were created: the signal construction and the valuation system for these two different signal types. This article looks at the recent market design changes and seeks to examine their impacts on system reliability as well as energy storage providers. Finally, the article considers the future direction of how energy storage interacts with frequency regulation needs.

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The author wishes to acknowledge helpful comments from a reviewer of an earlier draft. Any remaining errors are the responsibility of the author alone.

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The author wishes to acknowledge helpful comments from a reviewer of an earlier draft. Any remaining errors are the responsibility of the author alone.

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In recent years, the falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other competing storage technologies—such as pumped hydro, compressed air, and reversible fuel-cells—we can’t ignore the need to create smart ways to pay for their installation and operation in the face of changing demand.

In a future with a renewable grid, energy storage will be used for more than just load balancing the grid from the day-to-day needs caused by our variable energy sources and different levels of customer demand. It could be required to potentially store large quantities of energy for periods of weeks to months to facilitate energy consumption during peak periods such as winter heating months. To enable the proliferation of renewable power, long-term energy storage will become just as important a service as short-term power supply.

Due to the fickle nature of energy demand and supply, these storage assets may or may not be used on any given day. Storage providers will need to be incentivized to build storage and be paid for it even if the resource is underutilized. If they aren’t, they will be unlikely to build enough storage capacity and the grid operator may be forced into the use of expensive, short-term peak power (with higher prices that get passed on to customers).

Bloomberg’s BNEF reports that the amount of deployed energy storage will multiply by 122 times, from “9GW/17GWh deployed as of 2018 to 1,095GW/2,850GWh by 2040” and this growth will be primarily driven by a halving of the cost of batteries by 2030. Moreover, there are many energy storage projects being built in conjunction with renewable power developments due to these falling costs and the ability to balance intermittency. Smart contracting for storage could help accelerate this deployment of utility scale storage assets. 

We reviewed a public request for proposal contract that was made available a few years ago by Southern California Edison (SCE), and found that this contract included three sources of income for an energy storage operator:

  1. An ongoing payment for capacity of energy (watt-hours) provided
  2. Compensation for operations and maintenance cost of the storage unit
  3. A multiplier to the payment, if the monthly utilization of the unit met certain requirements

Conversations with players in the battery storage space (such as AMS, which develops artificial intelligence to price and dispatch energy storage) have indicated that batteries also provide ancillary services like regulating the frequency of power. Tiny injections of stored power can help the grid and the individual electricity power markets to maintain their frequency (Hz) requirements.

Though these contracts seem fair at surface level, the key element to note is the utilization related payment. If we have to build more storage than is needed on the average day, we must also build extra storage for days with peak energy demand. 

Since this extra storage may not be utilized frequently, storage contracts should integrate a minimum payment scheme that gives a base payment to the operator no matter what the utilization rate of the battery is, and therefore ensure the operator is compensated appropriately for their investment. Unlike the SCE contract, there might be no penalty for failing to meet utilization requirements (unless there was a mechanical failure) and the storage operator could earn a bonus for high utilization. This would be a way to incentivize enough storage to be built to continue supporting the ongoing energy transition.  

[summary] => [format] => full_html [safe_value] =>

In recent years, the falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other competing storage technologies—such as pumped hydro, compressed air, and reversible fuel-cells—we can’t ignore the need to create smart ways to pay for their installation and operation in the face of changing demand.

In a future with a renewable grid, energy storage will be used for more than just load balancing the grid from the day-to-day needs caused by our variable energy sources and different levels of customer demand. It could be required to potentially store large quantities of energy for periods of weeks to months to facilitate energy consumption during peak periods such as winter heating months. To enable the proliferation of renewable power, long-term energy storage will become just as important a service as short-term power supply.

Due to the fickle nature of energy demand and supply, these storage assets may or may not be used on any given day. Storage providers will need to be incentivized to build storage and be paid for it even if the resource is underutilized. If they aren’t, they will be unlikely to build enough storage capacity and the grid operator may be forced into the use of expensive, short-term peak power (with higher prices that get passed on to customers).

Bloomberg’s BNEF reports that the amount of deployed energy storage will multiply by 122 times, from “9GW/17GWh deployed as of 2018 to 1,095GW/2,850GWh by 2040” and this growth will be primarily driven by a halving of the cost of batteries by 2030. Moreover, there are many energy storage projects being built in conjunction with renewable power developments due to these falling costs and the ability to balance intermittency. Smart contracting for storage could help accelerate this deployment of utility scale storage assets. 

We reviewed a public request for proposal contract that was made available a few years ago by Southern California Edison (SCE), and found that this contract included three sources of income for an energy storage operator:

  1. An ongoing payment for capacity of energy (watt-hours) provided
  2. Compensation for operations and maintenance cost of the storage unit
  3. A multiplier to the payment, if the monthly utilization of the unit met certain requirements

Conversations with players in the battery storage space (such as AMS, which develops artificial intelligence to price and dispatch energy storage) have indicated that batteries also provide ancillary services like regulating the frequency of power. Tiny injections of stored power can help the grid and the individual electricity power markets to maintain their frequency (Hz) requirements.

Though these contracts seem fair at surface level, the key element to note is the utilization related payment. If we have to build more storage than is needed on the average day, we must also build extra storage for days with peak energy demand. 

Since this extra storage may not be utilized frequently, storage contracts should integrate a minimum payment scheme that gives a base payment to the operator no matter what the utilization rate of the battery is, and therefore ensure the operator is compensated appropriately for their investment. Unlike the SCE contract, there might be no penalty for failing to meet utilization requirements (unless there was a mechanical failure) and the storage operator could earn a bonus for high utilization. This would be a way to incentivize enough storage to be built to continue supporting the ongoing energy transition.  

[safe_summary] => ) ) [#formatter] => text_default [0] => Array ( [#markup] =>

In recent years, the falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other competing storage technologies—such as pumped hydro, compressed air, and reversible fuel-cells—we can’t ignore the need to create smart ways to pay for their installation and operation in the face of changing demand.

In a future with a renewable grid, energy storage will be used for more than just load balancing the grid from the day-to-day needs caused by our variable energy sources and different levels of customer demand. It could be required to potentially store large quantities of energy for periods of weeks to months to facilitate energy consumption during peak periods such as winter heating months. To enable the proliferation of renewable power, long-term energy storage will become just as important a service as short-term power supply.

Due to the fickle nature of energy demand and supply, these storage assets may or may not be used on any given day. Storage providers will need to be incentivized to build storage and be paid for it even if the resource is underutilized. If they aren’t, they will be unlikely to build enough storage capacity and the grid operator may be forced into the use of expensive, short-term peak power (with higher prices that get passed on to customers).

Bloomberg’s BNEF reports that the amount of deployed energy storage will multiply by 122 times, from “9GW/17GWh deployed as of 2018 to 1,095GW/2,850GWh by 2040” and this growth will be primarily driven by a halving of the cost of batteries by 2030. Moreover, there are many energy storage projects being built in conjunction with renewable power developments due to these falling costs and the ability to balance intermittency. Smart contracting for storage could help accelerate this deployment of utility scale storage assets. 

We reviewed a public request for proposal contract that was made available a few years ago by Southern California Edison (SCE), and found that this contract included three sources of income for an energy storage operator:

  1. An ongoing payment for capacity of energy (watt-hours) provided
  2. Compensation for operations and maintenance cost of the storage unit
  3. A multiplier to the payment, if the monthly utilization of the unit met certain requirements

Conversations with players in the battery storage space (such as AMS, which develops artificial intelligence to price and dispatch energy storage) have indicated that batteries also provide ancillary services like regulating the frequency of power. Tiny injections of stored power can help the grid and the individual electricity power markets to maintain their frequency (Hz) requirements.

Though these contracts seem fair at surface level, the key element to note is the utilization related payment. If we have to build more storage than is needed on the average day, we must also build extra storage for days with peak energy demand. 

Since this extra storage may not be utilized frequently, storage contracts should integrate a minimum payment scheme that gives a base payment to the operator no matter what the utilization rate of the battery is, and therefore ensure the operator is compensated appropriately for their investment. Unlike the SCE contract, there might be no penalty for failing to meet utilization requirements (unless there was a mechanical failure) and the storage operator could earn a bonus for high utilization. This would be a way to incentivize enough storage to be built to continue supporting the ongoing energy transition.  

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In recent years, the falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other competing storage technologies—such as pumped hydro, compressed air, and reversible fuel-cells—we can’t ignore the need to create smart ways to pay for their installation and operation in the face of changing demand.

In a future with a renewable grid, energy storage will be used for more than just load balancing the grid from the day-to-day needs caused by our variable energy sources and different levels of customer demand. It could be required to potentially store large quantities of energy for periods of weeks to months to facilitate energy consumption during peak periods such as winter heating months. To enable the proliferation of renewable power, long-term energy storage will become just as important a service as short-term power supply.

Due to the fickle nature of energy demand and supply, these storage assets may or may not be used on any given day. Storage providers will need to be incentivized to build storage and be paid for it even if the resource is underutilized. If they aren’t, they will be unlikely to build enough storage capacity and the grid operator may be forced into the use of expensive, short-term peak power (with higher prices that get passed on to customers).

Bloomberg’s BNEF reports that the amount of deployed energy storage will multiply by 122 times, from “9GW/17GWh deployed as of 2018 to 1,095GW/2,850GWh by 2040” and this growth will be primarily driven by a halving of the cost of batteries by 2030. Moreover, there are many energy storage projects being built in conjunction with renewable power developments due to these falling costs and the ability to balance intermittency. Smart contracting for storage could help accelerate this deployment of utility scale storage assets. 

We reviewed a public request for proposal contract that was made available a few years ago by Southern California Edison (SCE), and found that this contract included three sources of income for an energy storage operator:

  1. An ongoing payment for capacity of energy (watt-hours) provided
  2. Compensation for operations and maintenance cost of the storage unit
  3. A multiplier to the payment, if the monthly utilization of the unit met certain requirements

Conversations with players in the battery storage space (such as AMS, which develops artificial intelligence to price and dispatch energy storage) have indicated that batteries also provide ancillary services like regulating the frequency of power. Tiny injections of stored power can help the grid and the individual electricity power markets to maintain their frequency (Hz) requirements.

Though these contracts seem fair at surface level, the key element to note is the utilization related payment. If we have to build more storage than is needed on the average day, we must also build extra storage for days with peak energy demand. 

Since this extra storage may not be utilized frequently, storage contracts should integrate a minimum payment scheme that gives a base payment to the operator no matter what the utilization rate of the battery is, and therefore ensure the operator is compensated appropriately for their investment. Unlike the SCE contract, there might be no penalty for failing to meet utilization requirements (unless there was a mechanical failure) and the storage operator could earn a bonus for high utilization. This would be a way to incentivize enough storage to be built to continue supporting the ongoing energy transition.  

[summary] => [format] => full_html [safe_value] =>

In recent years, the falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other competing storage technologies—such as pumped hydro, compressed air, and reversible fuel-cells—we can’t ignore the need to create smart ways to pay for their installation and operation in the face of changing demand.

In a future with a renewable grid, energy storage will be used for more than just load balancing the grid from the day-to-day needs caused by our variable energy sources and different levels of customer demand. It could be required to potentially store large quantities of energy for periods of weeks to months to facilitate energy consumption during peak periods such as winter heating months. To enable the proliferation of renewable power, long-term energy storage will become just as important a service as short-term power supply.

Due to the fickle nature of energy demand and supply, these storage assets may or may not be used on any given day. Storage providers will need to be incentivized to build storage and be paid for it even if the resource is underutilized. If they aren’t, they will be unlikely to build enough storage capacity and the grid operator may be forced into the use of expensive, short-term peak power (with higher prices that get passed on to customers).

Bloomberg’s BNEF reports that the amount of deployed energy storage will multiply by 122 times, from “9GW/17GWh deployed as of 2018 to 1,095GW/2,850GWh by 2040” and this growth will be primarily driven by a halving of the cost of batteries by 2030. Moreover, there are many energy storage projects being built in conjunction with renewable power developments due to these falling costs and the ability to balance intermittency. Smart contracting for storage could help accelerate this deployment of utility scale storage assets. 

We reviewed a public request for proposal contract that was made available a few years ago by Southern California Edison (SCE), and found that this contract included three sources of income for an energy storage operator:

  1. An ongoing payment for capacity of energy (watt-hours) provided
  2. Compensation for operations and maintenance cost of the storage unit
  3. A multiplier to the payment, if the monthly utilization of the unit met certain requirements

Conversations with players in the battery storage space (such as AMS, which develops artificial intelligence to price and dispatch energy storage) have indicated that batteries also provide ancillary services like regulating the frequency of power. Tiny injections of stored power can help the grid and the individual electricity power markets to maintain their frequency (Hz) requirements.

Though these contracts seem fair at surface level, the key element to note is the utilization related payment. If we have to build more storage than is needed on the average day, we must also build extra storage for days with peak energy demand. 

Since this extra storage may not be utilized frequently, storage contracts should integrate a minimum payment scheme that gives a base payment to the operator no matter what the utilization rate of the battery is, and therefore ensure the operator is compensated appropriately for their investment. Unlike the SCE contract, there might be no penalty for failing to meet utilization requirements (unless there was a mechanical failure) and the storage operator could earn a bonus for high utilization. This would be a way to incentivize enough storage to be built to continue supporting the ongoing energy transition.  

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is currently pursuing a master's in business administration from the Wharton School amd a master's in international studies from the Lauder Institute.

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is currently pursuing a master's in business administration from the Wharton School amd a master's in international studies from the Lauder Institute.

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The falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other storage technologies, there is a need to create smart ways to pay for their installation and operation.

[format] => full_html [safe_value] =>

The falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other storage technologies, there is a need to create smart ways to pay for their installation and operation.

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New energy storage technologies are increasingly connecting to the electric grid, but it’s not clear that current rules in electricity markets are designed to help storage and new distributed energy resources (DER) participate as fully as other generation.  The federal government’s electricity market regulator, FERC, has issued a notice with proposed rules that could create new opportunities for deployment and investment but also raise questions for stakeholders to address.

Guest Ken Kulak is a partner at the law firm of Morgan Lewis, where he advises clients on energy regulation and complex energy transactions. He has worked on a wide variety of renewable energy projects and helps clients navigate the legal issues associated with the development, purchase, sale and financing of renewable energy in evolving regulatory frameworks.

 

[summary] => [format] => full_html [safe_value] =>

New energy storage technologies are increasingly connecting to the electric grid, but it’s not clear that current rules in electricity markets are designed to help storage and new distributed energy resources (DER) participate as fully as other generation.  The federal government’s electricity market regulator, FERC, has issued a notice with proposed rules that could create new opportunities for deployment and investment but also raise questions for stakeholders to address.

Guest Ken Kulak is a partner at the law firm of Morgan Lewis, where he advises clients on energy regulation and complex energy transactions. He has worked on a wide variety of renewable energy projects and helps clients navigate the legal issues associated with the development, purchase, sale and financing of renewable energy in evolving regulatory frameworks.

 

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Energy storage in electricity markets is on the rise, and the Federal Energy Regulatory Commission (FERC) is weighing in with new rules that could change deployment of storage and distributed energy resources across the country.

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Energy storage in electricity markets is on the rise, and the Federal Energy Regulatory Commission (FERC) is weighing in with new rules that could change deployment of storage and distributed energy resources across the country.

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At the end of March, Florida Power and Light (FPL) announced that the company will build the world’s largest battery storage system to complement its existing solar power plant, to begin operations in late 2021. The system will be a 409-MW/900-MWh battery storage facility, around four times the storage capacity of the world’s current largest battery system at the Hornsdale Power Reserve in Australia.

The U.S. energy storage market has seen a major expansion in recent years— the market nearly doubled in 2018 and is expected to double again in 2019. Large utility-scale projects like FPL’s, signal that the industry is maturing and solving operational and financial challenges that previously hindered large-scale deployments.

The Kleinman Center recently invited a panel moderated by Wharton Professor Arthur Van Benthem to speak to the trends and challenges of the energy storage sector. The panelists included:

  • Ravi Manghani: Director of Energy Storage, Wood Mackenzie Power & Renewables
  • Arjun Prasad Ramadevanahalli: Associate, Morgan Lewis Law Firm
  • Paul Reed: Director of Business Development & Account Management, Viridity Energy

Below are the key takeaways to share from this panel:

  • 10x growth: Energy storage is poised for a rapid acceleration of installed capacity, projected to grow more than ten times in the next 5 to 7 years. The growth is driven by several technology and market dynamics, including:
    • High utility demand charges– for commercial and industrial customers, peak demand charges (highest energy consumption rate at any time during the billing period) can compose 40 to 60% of their total utility bill. Storage is a key solution for reducing peak demand.
    • Net energy metering shifts– utilities are pushing back against buying excess energy generated from renewable sources at retail prices; thus, owners of renewable generators are better off storing the energy to be used at a different time than sell the energy back to the grid.
    • Declining system prices– the cost of lithium-ion batteries has decreased 85% between 2014 to 2018 and is continuing to decrease. The cost curve is similar to the ones from the solar industry in recent years.
       
  • Order 841: In a big step forward, the Federal Energy Regulatory Commission (FERC) passed Order 841 this year on February 28 as a mandate to Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to establish market rules for energy storage. These rules should allow storage resources to participate in the market as both a buyer and seller, enabling storage to compete against traditional fossil fuel burning resources such as peaking plants. Many regulatory issues are pending, including understanding the impact to the distribution grid from bidirectional flow, procedures to connect the devices to the grid, and transmission access charges.
     
  • The Swiss army knife of the energy industry: Storage is often called the Swiss army knife of the industry because it can be flexed to perform different functions throughout the value chain, depending on the design and location.
    • Generation– renewables integration/firming (e.g. reserves solar energy, for use at night), microgrids, instantaneous power output
    • Transmission & Distribution (T&D)– frequency regulation, T&D asset deferral, congestion relief
    • Consumption– peak shaving, demand management, back-up supply
       
  • How storage is monetized: Given the flexibility in design and application, storage resources can be monetized through different models at scale.
    • Contracted revenue– a buyer pays the storage owner a fixed charge for its right to utilize the battery’s capacity and charging/discharging
    • Merchant revenue – selling energy from the storage resource back to the wholesale electricity market
    • License– provide ‘energy-storage-as-a-service’ or demand management services to customers

As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. Storage, especially when complemented with renewables, is proving to be the innovation that can address this need. Much progress has been made and today’s market dynamics and new policy structure will continue to push the storage market forward.

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At the end of March, Florida Power and Light (FPL) announced that the company will build the world’s largest battery storage system to complement its existing solar power plant, to begin operations in late 2021. The system will be a 409-MW/900-MWh battery storage facility, around four times the storage capacity of the world’s current largest battery system at the Hornsdale Power Reserve in Australia.

The U.S. energy storage market has seen a major expansion in recent years— the market nearly doubled in 2018 and is expected to double again in 2019. Large utility-scale projects like FPL’s, signal that the industry is maturing and solving operational and financial challenges that previously hindered large-scale deployments.

The Kleinman Center recently invited a panel moderated by Wharton Professor Arthur Van Benthem to speak to the trends and challenges of the energy storage sector. The panelists included:

  • Ravi Manghani: Director of Energy Storage, Wood Mackenzie Power & Renewables
  • Arjun Prasad Ramadevanahalli: Associate, Morgan Lewis Law Firm
  • Paul Reed: Director of Business Development & Account Management, Viridity Energy

Below are the key takeaways to share from this panel:

  • 10x growth: Energy storage is poised for a rapid acceleration of installed capacity, projected to grow more than ten times in the next 5 to 7 years. The growth is driven by several technology and market dynamics, including:
    • High utility demand charges– for commercial and industrial customers, peak demand charges (highest energy consumption rate at any time during the billing period) can compose 40 to 60% of their total utility bill. Storage is a key solution for reducing peak demand.
    • Net energy metering shifts– utilities are pushing back against buying excess energy generated from renewable sources at retail prices; thus, owners of renewable generators are better off storing the energy to be used at a different time than sell the energy back to the grid.
    • Declining system prices– the cost of lithium-ion batteries has decreased 85% between 2014 to 2018 and is continuing to decrease. The cost curve is similar to the ones from the solar industry in recent years.
       
  • Order 841: In a big step forward, the Federal Energy Regulatory Commission (FERC) passed Order 841 this year on February 28 as a mandate to Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to establish market rules for energy storage. These rules should allow storage resources to participate in the market as both a buyer and seller, enabling storage to compete against traditional fossil fuel burning resources such as peaking plants. Many regulatory issues are pending, including understanding the impact to the distribution grid from bidirectional flow, procedures to connect the devices to the grid, and transmission access charges.
     
  • The Swiss army knife of the energy industry: Storage is often called the Swiss army knife of the industry because it can be flexed to perform different functions throughout the value chain, depending on the design and location.
    • Generation– renewables integration/firming (e.g. reserves solar energy, for use at night), microgrids, instantaneous power output
    • Transmission & Distribution (T&D)– frequency regulation, T&D asset deferral, congestion relief
    • Consumption– peak shaving, demand management, back-up supply
       
  • How storage is monetized: Given the flexibility in design and application, storage resources can be monetized through different models at scale.
    • Contracted revenue– a buyer pays the storage owner a fixed charge for its right to utilize the battery’s capacity and charging/discharging
    • Merchant revenue – selling energy from the storage resource back to the wholesale electricity market
    • License– provide ‘energy-storage-as-a-service’ or demand management services to customers

As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. Storage, especially when complemented with renewables, is proving to be the innovation that can address this need. Much progress has been made and today’s market dynamics and new policy structure will continue to push the storage market forward.

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As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. A recent panel explored the state of today’s energy storage.

[format] => full_html [safe_value] =>

As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. A recent panel explored the state of today’s energy storage.

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Executive Summary

To maintain reliability, the electric power grid needs to always balance electrical supply with demand. While grid operators pay close attention to forecasting load (i.e. demand) and scheduling generation (i.e. planning for dispatch of generation supply) ahead of time, there will be short-term errors in load forecasts or unexpected fluctuations of power plant output. Because demand and supply need to be balanced almost immediately, these sudden changes necessitate instantaneous adjustments within the timeframe of seconds to minutes. So grid operators rely upon “frequency regulation” resources to correct for these small mismatches between supply and demand. Frequency regulation resources are paid to automatically adjust output according to the operator’s signal in order to respond to these short-term fluctuations.

Traditionally, centralized power plants (like hydropower, steam generators, or combustion turbines) have provided frequency regulation services. Following recent technological and cost improvements, energy storage technologies (including batteries and flywheels) have begun to provide frequency regulation to grid systems as well. In 2012, the PJM Interconnection (PJM)—the regional transmission organization that operates the electricity grid across 13 mid-Atlantic states and D.C.—divided its frequency regulation market into slow and fast components. Fast response resources included energy storage that could absorb or release power very quickly, and more traditional resources like natural gas-fired power plants that could ramp power up and down with a slight delay.

The fast frequency regulation product was initially designed to require resources to provide zero energy on net when averaged over 15 minute periods. This concept, where the cumulative energy input equals the cumulative energy output, is called “energy neutrality.” This design enhanced the ability of energy storage resources to respond to the grid operator’s frequency regulation signals by ensuring the storage resource had available capacity to offer. As a result of this design, a lot of energy storage investment occurred in the PJM region. As of August 2016, PJM accounted for 46 percent of the rated power (MW) of grid-connected battery projects operational in the United States (DOE Office of Electricity Delivery & Energy Reliability 2016). Recently, other regions such as California have seen substantial energy storage deployment.

Frequency regulation has played a large role in energy storage commercialization, and will continue to play a role. But how large a role depends on changes to the design of PJM’s frequency regulation market. PJM embarked on these changes in an effort to correct observed problems in the market. Specifically, some energy storage resources at some instances would be pulling power from the grid in an effort to achieve energy neutrality at the precise time the grid operator needed resources to be injecting power, and vice versa.

Starting in 2015, PJM embarked on a series of changes to its frequency regulation market to correct for observed issues, and more changes are being proposed. Changes implemented to date have resulted in reduced growth rates of energy storage resources in the PJM footprint. The energy storage industry perceives these market changes to be unduly unfair, and is challenging PJM through two complaints before the Federal Energy Regulatory Commission (FERC).

The underlying technological issue facing PJM’s frequency regulation system is that advanced energy storage units can provide quick and accurate responses in a short timescale, but cannot sustain this output for a long time. Consequently, PJM, the energy storage industry, and the Federal Energy Regulatory Commission (FERC) need to resolve a significant market design challenge: How should the market place different technologies on a competitive playing field when their technical characteristics differ fundamentally, all while protecting system reliability? 

This report will focus on the technological and economic aspects of PJM’s frequency regulation market design, while avoiding commenting on the legal nuances of the ongoing complaints. This report first discusses the importance of frequency regulation in relation to compliance with reliability standards. Then it provides an overview of how two central market design dimensions of the PJM frequency regulation system were created: the signal construction and the valuation system for these two different signal types. This article looks at the recent market design changes and seeks to examine their impacts on system reliability as well as energy storage providers. Finally, the article considers the future direction of how energy storage interacts with frequency regulation needs.

[summary] => [format] => full_html [safe_value] =>

Executive Summary

To maintain reliability, the electric power grid needs to always balance electrical supply with demand. While grid operators pay close attention to forecasting load (i.e. demand) and scheduling generation (i.e. planning for dispatch of generation supply) ahead of time, there will be short-term errors in load forecasts or unexpected fluctuations of power plant output. Because demand and supply need to be balanced almost immediately, these sudden changes necessitate instantaneous adjustments within the timeframe of seconds to minutes. So grid operators rely upon “frequency regulation” resources to correct for these small mismatches between supply and demand. Frequency regulation resources are paid to automatically adjust output according to the operator’s signal in order to respond to these short-term fluctuations.

Traditionally, centralized power plants (like hydropower, steam generators, or combustion turbines) have provided frequency regulation services. Following recent technological and cost improvements, energy storage technologies (including batteries and flywheels) have begun to provide frequency regulation to grid systems as well. In 2012, the PJM Interconnection (PJM)—the regional transmission organization that operates the electricity grid across 13 mid-Atlantic states and D.C.—divided its frequency regulation market into slow and fast components. Fast response resources included energy storage that could absorb or release power very quickly, and more traditional resources like natural gas-fired power plants that could ramp power up and down with a slight delay.

The fast frequency regulation product was initially designed to require resources to provide zero energy on net when averaged over 15 minute periods. This concept, where the cumulative energy input equals the cumulative energy output, is called “energy neutrality.” This design enhanced the ability of energy storage resources to respond to the grid operator’s frequency regulation signals by ensuring the storage resource had available capacity to offer. As a result of this design, a lot of energy storage investment occurred in the PJM region. As of August 2016, PJM accounted for 46 percent of the rated power (MW) of grid-connected battery projects operational in the United States (DOE Office of Electricity Delivery & Energy Reliability 2016). Recently, other regions such as California have seen substantial energy storage deployment.

Frequency regulation has played a large role in energy storage commercialization, and will continue to play a role. But how large a role depends on changes to the design of PJM’s frequency regulation market. PJM embarked on these changes in an effort to correct observed problems in the market. Specifically, some energy storage resources at some instances would be pulling power from the grid in an effort to achieve energy neutrality at the precise time the grid operator needed resources to be injecting power, and vice versa.

Starting in 2015, PJM embarked on a series of changes to its frequency regulation market to correct for observed issues, and more changes are being proposed. Changes implemented to date have resulted in reduced growth rates of energy storage resources in the PJM footprint. The energy storage industry perceives these market changes to be unduly unfair, and is challenging PJM through two complaints before the Federal Energy Regulatory Commission (FERC).

The underlying technological issue facing PJM’s frequency regulation system is that advanced energy storage units can provide quick and accurate responses in a short timescale, but cannot sustain this output for a long time. Consequently, PJM, the energy storage industry, and the Federal Energy Regulatory Commission (FERC) need to resolve a significant market design challenge: How should the market place different technologies on a competitive playing field when their technical characteristics differ fundamentally, all while protecting system reliability? 

This report will focus on the technological and economic aspects of PJM’s frequency regulation market design, while avoiding commenting on the legal nuances of the ongoing complaints. This report first discusses the importance of frequency regulation in relation to compliance with reliability standards. Then it provides an overview of how two central market design dimensions of the PJM frequency regulation system were created: the signal construction and the valuation system for these two different signal types. This article looks at the recent market design changes and seeks to examine their impacts on system reliability as well as energy storage providers. Finally, the article considers the future direction of how energy storage interacts with frequency regulation needs.

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The author wishes to acknowledge helpful comments from a reviewer of an earlier draft. Any remaining errors are the responsibility of the author alone.

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The author wishes to acknowledge helpful comments from a reviewer of an earlier draft. Any remaining errors are the responsibility of the author alone.

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New energy storage technologies are increasingly connecting to the electric grid, but it’s not clear that current rules in electricity markets are designed to help storage and new distributed energy resources (DER) participate as fully as other generation.  The federal government’s electricity market regulator, FERC, has issued a notice with proposed rules that could create new opportunities for deployment and investment but also raise questions for stakeholders to address.

Guest Ken Kulak is a partner at the law firm of Morgan Lewis, where he advises clients on energy regulation and complex energy transactions. He has worked on a wide variety of renewable energy projects and helps clients navigate the legal issues associated with the development, purchase, sale and financing of renewable energy in evolving regulatory frameworks.

 

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New energy storage technologies are increasingly connecting to the electric grid, but it’s not clear that current rules in electricity markets are designed to help storage and new distributed energy resources (DER) participate as fully as other generation.  The federal government’s electricity market regulator, FERC, has issued a notice with proposed rules that could create new opportunities for deployment and investment but also raise questions for stakeholders to address.

Guest Ken Kulak is a partner at the law firm of Morgan Lewis, where he advises clients on energy regulation and complex energy transactions. He has worked on a wide variety of renewable energy projects and helps clients navigate the legal issues associated with the development, purchase, sale and financing of renewable energy in evolving regulatory frameworks.

 

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Energy storage in electricity markets is on the rise, and the Federal Energy Regulatory Commission (FERC) is weighing in with new rules that could change deployment of storage and distributed energy resources across the country.

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Energy storage in electricity markets is on the rise, and the Federal Energy Regulatory Commission (FERC) is weighing in with new rules that could change deployment of storage and distributed energy resources across the country.

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At the end of March, Florida Power and Light (FPL) announced that the company will build the world’s largest battery storage system to complement its existing solar power plant, to begin operations in late 2021. The system will be a 409-MW/900-MWh battery storage facility, around four times the storage capacity of the world’s current largest battery system at the Hornsdale Power Reserve in Australia.

The U.S. energy storage market has seen a major expansion in recent years— the market nearly doubled in 2018 and is expected to double again in 2019. Large utility-scale projects like FPL’s, signal that the industry is maturing and solving operational and financial challenges that previously hindered large-scale deployments.

The Kleinman Center recently invited a panel moderated by Wharton Professor Arthur Van Benthem to speak to the trends and challenges of the energy storage sector. The panelists included:

  • Ravi Manghani: Director of Energy Storage, Wood Mackenzie Power & Renewables
  • Arjun Prasad Ramadevanahalli: Associate, Morgan Lewis Law Firm
  • Paul Reed: Director of Business Development & Account Management, Viridity Energy

Below are the key takeaways to share from this panel:

  • 10x growth: Energy storage is poised for a rapid acceleration of installed capacity, projected to grow more than ten times in the next 5 to 7 years. The growth is driven by several technology and market dynamics, including:
    • High utility demand charges– for commercial and industrial customers, peak demand charges (highest energy consumption rate at any time during the billing period) can compose 40 to 60% of their total utility bill. Storage is a key solution for reducing peak demand.
    • Net energy metering shifts– utilities are pushing back against buying excess energy generated from renewable sources at retail prices; thus, owners of renewable generators are better off storing the energy to be used at a different time than sell the energy back to the grid.
    • Declining system prices– the cost of lithium-ion batteries has decreased 85% between 2014 to 2018 and is continuing to decrease. The cost curve is similar to the ones from the solar industry in recent years.
       
  • Order 841: In a big step forward, the Federal Energy Regulatory Commission (FERC) passed Order 841 this year on February 28 as a mandate to Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to establish market rules for energy storage. These rules should allow storage resources to participate in the market as both a buyer and seller, enabling storage to compete against traditional fossil fuel burning resources such as peaking plants. Many regulatory issues are pending, including understanding the impact to the distribution grid from bidirectional flow, procedures to connect the devices to the grid, and transmission access charges.
     
  • The Swiss army knife of the energy industry: Storage is often called the Swiss army knife of the industry because it can be flexed to perform different functions throughout the value chain, depending on the design and location.
    • Generation– renewables integration/firming (e.g. reserves solar energy, for use at night), microgrids, instantaneous power output
    • Transmission & Distribution (T&D)– frequency regulation, T&D asset deferral, congestion relief
    • Consumption– peak shaving, demand management, back-up supply
       
  • How storage is monetized: Given the flexibility in design and application, storage resources can be monetized through different models at scale.
    • Contracted revenue– a buyer pays the storage owner a fixed charge for its right to utilize the battery’s capacity and charging/discharging
    • Merchant revenue – selling energy from the storage resource back to the wholesale electricity market
    • License– provide ‘energy-storage-as-a-service’ or demand management services to customers

As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. Storage, especially when complemented with renewables, is proving to be the innovation that can address this need. Much progress has been made and today’s market dynamics and new policy structure will continue to push the storage market forward.

[summary] => [format] => full_html [safe_value] =>

At the end of March, Florida Power and Light (FPL) announced that the company will build the world’s largest battery storage system to complement its existing solar power plant, to begin operations in late 2021. The system will be a 409-MW/900-MWh battery storage facility, around four times the storage capacity of the world’s current largest battery system at the Hornsdale Power Reserve in Australia.

The U.S. energy storage market has seen a major expansion in recent years— the market nearly doubled in 2018 and is expected to double again in 2019. Large utility-scale projects like FPL’s, signal that the industry is maturing and solving operational and financial challenges that previously hindered large-scale deployments.

The Kleinman Center recently invited a panel moderated by Wharton Professor Arthur Van Benthem to speak to the trends and challenges of the energy storage sector. The panelists included:

  • Ravi Manghani: Director of Energy Storage, Wood Mackenzie Power & Renewables
  • Arjun Prasad Ramadevanahalli: Associate, Morgan Lewis Law Firm
  • Paul Reed: Director of Business Development & Account Management, Viridity Energy

Below are the key takeaways to share from this panel:

  • 10x growth: Energy storage is poised for a rapid acceleration of installed capacity, projected to grow more than ten times in the next 5 to 7 years. The growth is driven by several technology and market dynamics, including:
    • High utility demand charges– for commercial and industrial customers, peak demand charges (highest energy consumption rate at any time during the billing period) can compose 40 to 60% of their total utility bill. Storage is a key solution for reducing peak demand.
    • Net energy metering shifts– utilities are pushing back against buying excess energy generated from renewable sources at retail prices; thus, owners of renewable generators are better off storing the energy to be used at a different time than sell the energy back to the grid.
    • Declining system prices– the cost of lithium-ion batteries has decreased 85% between 2014 to 2018 and is continuing to decrease. The cost curve is similar to the ones from the solar industry in recent years.
       
  • Order 841: In a big step forward, the Federal Energy Regulatory Commission (FERC) passed Order 841 this year on February 28 as a mandate to Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to establish market rules for energy storage. These rules should allow storage resources to participate in the market as both a buyer and seller, enabling storage to compete against traditional fossil fuel burning resources such as peaking plants. Many regulatory issues are pending, including understanding the impact to the distribution grid from bidirectional flow, procedures to connect the devices to the grid, and transmission access charges.
     
  • The Swiss army knife of the energy industry: Storage is often called the Swiss army knife of the industry because it can be flexed to perform different functions throughout the value chain, depending on the design and location.
    • Generation– renewables integration/firming (e.g. reserves solar energy, for use at night), microgrids, instantaneous power output
    • Transmission & Distribution (T&D)– frequency regulation, T&D asset deferral, congestion relief
    • Consumption– peak shaving, demand management, back-up supply
       
  • How storage is monetized: Given the flexibility in design and application, storage resources can be monetized through different models at scale.
    • Contracted revenue– a buyer pays the storage owner a fixed charge for its right to utilize the battery’s capacity and charging/discharging
    • Merchant revenue – selling energy from the storage resource back to the wholesale electricity market
    • License– provide ‘energy-storage-as-a-service’ or demand management services to customers

As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. Storage, especially when complemented with renewables, is proving to be the innovation that can address this need. Much progress has been made and today’s market dynamics and new policy structure will continue to push the storage market forward.

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As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. A recent panel explored the state of today’s energy storage.

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As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. A recent panel explored the state of today’s energy storage.

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Executive Summary

To maintain reliability, the electric power grid needs to always balance electrical supply with demand. While grid operators pay close attention to forecasting load (i.e. demand) and scheduling generation (i.e. planning for dispatch of generation supply) ahead of time, there will be short-term errors in load forecasts or unexpected fluctuations of power plant output. Because demand and supply need to be balanced almost immediately, these sudden changes necessitate instantaneous adjustments within the timeframe of seconds to minutes. So grid operators rely upon “frequency regulation” resources to correct for these small mismatches between supply and demand. Frequency regulation resources are paid to automatically adjust output according to the operator’s signal in order to respond to these short-term fluctuations.

Traditionally, centralized power plants (like hydropower, steam generators, or combustion turbines) have provided frequency regulation services. Following recent technological and cost improvements, energy storage technologies (including batteries and flywheels) have begun to provide frequency regulation to grid systems as well. In 2012, the PJM Interconnection (PJM)—the regional transmission organization that operates the electricity grid across 13 mid-Atlantic states and D.C.—divided its frequency regulation market into slow and fast components. Fast response resources included energy storage that could absorb or release power very quickly, and more traditional resources like natural gas-fired power plants that could ramp power up and down with a slight delay.

The fast frequency regulation product was initially designed to require resources to provide zero energy on net when averaged over 15 minute periods. This concept, where the cumulative energy input equals the cumulative energy output, is called “energy neutrality.” This design enhanced the ability of energy storage resources to respond to the grid operator’s frequency regulation signals by ensuring the storage resource had available capacity to offer. As a result of this design, a lot of energy storage investment occurred in the PJM region. As of August 2016, PJM accounted for 46 percent of the rated power (MW) of grid-connected battery projects operational in the United States (DOE Office of Electricity Delivery & Energy Reliability 2016). Recently, other regions such as California have seen substantial energy storage deployment.

Frequency regulation has played a large role in energy storage commercialization, and will continue to play a role. But how large a role depends on changes to the design of PJM’s frequency regulation market. PJM embarked on these changes in an effort to correct observed problems in the market. Specifically, some energy storage resources at some instances would be pulling power from the grid in an effort to achieve energy neutrality at the precise time the grid operator needed resources to be injecting power, and vice versa.

Starting in 2015, PJM embarked on a series of changes to its frequency regulation market to correct for observed issues, and more changes are being proposed. Changes implemented to date have resulted in reduced growth rates of energy storage resources in the PJM footprint. The energy storage industry perceives these market changes to be unduly unfair, and is challenging PJM through two complaints before the Federal Energy Regulatory Commission (FERC).

The underlying technological issue facing PJM’s frequency regulation system is that advanced energy storage units can provide quick and accurate responses in a short timescale, but cannot sustain this output for a long time. Consequently, PJM, the energy storage industry, and the Federal Energy Regulatory Commission (FERC) need to resolve a significant market design challenge: How should the market place different technologies on a competitive playing field when their technical characteristics differ fundamentally, all while protecting system reliability? 

This report will focus on the technological and economic aspects of PJM’s frequency regulation market design, while avoiding commenting on the legal nuances of the ongoing complaints. This report first discusses the importance of frequency regulation in relation to compliance with reliability standards. Then it provides an overview of how two central market design dimensions of the PJM frequency regulation system were created: the signal construction and the valuation system for these two different signal types. This article looks at the recent market design changes and seeks to examine their impacts on system reliability as well as energy storage providers. Finally, the article considers the future direction of how energy storage interacts with frequency regulation needs.

[summary] => [format] => full_html [safe_value] =>

Executive Summary

To maintain reliability, the electric power grid needs to always balance electrical supply with demand. While grid operators pay close attention to forecasting load (i.e. demand) and scheduling generation (i.e. planning for dispatch of generation supply) ahead of time, there will be short-term errors in load forecasts or unexpected fluctuations of power plant output. Because demand and supply need to be balanced almost immediately, these sudden changes necessitate instantaneous adjustments within the timeframe of seconds to minutes. So grid operators rely upon “frequency regulation” resources to correct for these small mismatches between supply and demand. Frequency regulation resources are paid to automatically adjust output according to the operator’s signal in order to respond to these short-term fluctuations.

Traditionally, centralized power plants (like hydropower, steam generators, or combustion turbines) have provided frequency regulation services. Following recent technological and cost improvements, energy storage technologies (including batteries and flywheels) have begun to provide frequency regulation to grid systems as well. In 2012, the PJM Interconnection (PJM)—the regional transmission organization that operates the electricity grid across 13 mid-Atlantic states and D.C.—divided its frequency regulation market into slow and fast components. Fast response resources included energy storage that could absorb or release power very quickly, and more traditional resources like natural gas-fired power plants that could ramp power up and down with a slight delay.

The fast frequency regulation product was initially designed to require resources to provide zero energy on net when averaged over 15 minute periods. This concept, where the cumulative energy input equals the cumulative energy output, is called “energy neutrality.” This design enhanced the ability of energy storage resources to respond to the grid operator’s frequency regulation signals by ensuring the storage resource had available capacity to offer. As a result of this design, a lot of energy storage investment occurred in the PJM region. As of August 2016, PJM accounted for 46 percent of the rated power (MW) of grid-connected battery projects operational in the United States (DOE Office of Electricity Delivery & Energy Reliability 2016). Recently, other regions such as California have seen substantial energy storage deployment.

Frequency regulation has played a large role in energy storage commercialization, and will continue to play a role. But how large a role depends on changes to the design of PJM’s frequency regulation market. PJM embarked on these changes in an effort to correct observed problems in the market. Specifically, some energy storage resources at some instances would be pulling power from the grid in an effort to achieve energy neutrality at the precise time the grid operator needed resources to be injecting power, and vice versa.

Starting in 2015, PJM embarked on a series of changes to its frequency regulation market to correct for observed issues, and more changes are being proposed. Changes implemented to date have resulted in reduced growth rates of energy storage resources in the PJM footprint. The energy storage industry perceives these market changes to be unduly unfair, and is challenging PJM through two complaints before the Federal Energy Regulatory Commission (FERC).

The underlying technological issue facing PJM’s frequency regulation system is that advanced energy storage units can provide quick and accurate responses in a short timescale, but cannot sustain this output for a long time. Consequently, PJM, the energy storage industry, and the Federal Energy Regulatory Commission (FERC) need to resolve a significant market design challenge: How should the market place different technologies on a competitive playing field when their technical characteristics differ fundamentally, all while protecting system reliability? 

This report will focus on the technological and economic aspects of PJM’s frequency regulation market design, while avoiding commenting on the legal nuances of the ongoing complaints. This report first discusses the importance of frequency regulation in relation to compliance with reliability standards. Then it provides an overview of how two central market design dimensions of the PJM frequency regulation system were created: the signal construction and the valuation system for these two different signal types. This article looks at the recent market design changes and seeks to examine their impacts on system reliability as well as energy storage providers. Finally, the article considers the future direction of how energy storage interacts with frequency regulation needs.

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The author wishes to acknowledge helpful comments from a reviewer of an earlier draft. Any remaining errors are the responsibility of the author alone.

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The author wishes to acknowledge helpful comments from a reviewer of an earlier draft. Any remaining errors are the responsibility of the author alone.

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New energy storage technologies are increasingly connecting to the electric grid, but it’s not clear that current rules in electricity markets are designed to help storage and new distributed energy resources (DER) participate as fully as other generation.  The federal government’s electricity market regulator, FERC, has issued a notice with proposed rules that could create new opportunities for deployment and investment but also raise questions for stakeholders to address.

Guest Ken Kulak is a partner at the law firm of Morgan Lewis, where he advises clients on energy regulation and complex energy transactions. He has worked on a wide variety of renewable energy projects and helps clients navigate the legal issues associated with the development, purchase, sale and financing of renewable energy in evolving regulatory frameworks.

 

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New energy storage technologies are increasingly connecting to the electric grid, but it’s not clear that current rules in electricity markets are designed to help storage and new distributed energy resources (DER) participate as fully as other generation.  The federal government’s electricity market regulator, FERC, has issued a notice with proposed rules that could create new opportunities for deployment and investment but also raise questions for stakeholders to address.

Guest Ken Kulak is a partner at the law firm of Morgan Lewis, where he advises clients on energy regulation and complex energy transactions. He has worked on a wide variety of renewable energy projects and helps clients navigate the legal issues associated with the development, purchase, sale and financing of renewable energy in evolving regulatory frameworks.

 

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Energy storage in electricity markets is on the rise, and the Federal Energy Regulatory Commission (FERC) is weighing in with new rules that could change deployment of storage and distributed energy resources across the country.

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Energy storage in electricity markets is on the rise, and the Federal Energy Regulatory Commission (FERC) is weighing in with new rules that could change deployment of storage and distributed energy resources across the country.

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At the end of March, Florida Power and Light (FPL) announced that the company will build the world’s largest battery storage system to complement its existing solar power plant, to begin operations in late 2021. The system will be a 409-MW/900-MWh battery storage facility, around four times the storage capacity of the world’s current largest battery system at the Hornsdale Power Reserve in Australia.

The U.S. energy storage market has seen a major expansion in recent years— the market nearly doubled in 2018 and is expected to double again in 2019. Large utility-scale projects like FPL’s, signal that the industry is maturing and solving operational and financial challenges that previously hindered large-scale deployments.

The Kleinman Center recently invited a panel moderated by Wharton Professor Arthur Van Benthem to speak to the trends and challenges of the energy storage sector. The panelists included:

  • Ravi Manghani: Director of Energy Storage, Wood Mackenzie Power & Renewables
  • Arjun Prasad Ramadevanahalli: Associate, Morgan Lewis Law Firm
  • Paul Reed: Director of Business Development & Account Management, Viridity Energy

Below are the key takeaways to share from this panel:

  • 10x growth: Energy storage is poised for a rapid acceleration of installed capacity, projected to grow more than ten times in the next 5 to 7 years. The growth is driven by several technology and market dynamics, including:
    • High utility demand charges– for commercial and industrial customers, peak demand charges (highest energy consumption rate at any time during the billing period) can compose 40 to 60% of their total utility bill. Storage is a key solution for reducing peak demand.
    • Net energy metering shifts– utilities are pushing back against buying excess energy generated from renewable sources at retail prices; thus, owners of renewable generators are better off storing the energy to be used at a different time than sell the energy back to the grid.
    • Declining system prices– the cost of lithium-ion batteries has decreased 85% between 2014 to 2018 and is continuing to decrease. The cost curve is similar to the ones from the solar industry in recent years.
       
  • Order 841: In a big step forward, the Federal Energy Regulatory Commission (FERC) passed Order 841 this year on February 28 as a mandate to Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to establish market rules for energy storage. These rules should allow storage resources to participate in the market as both a buyer and seller, enabling storage to compete against traditional fossil fuel burning resources such as peaking plants. Many regulatory issues are pending, including understanding the impact to the distribution grid from bidirectional flow, procedures to connect the devices to the grid, and transmission access charges.
     
  • The Swiss army knife of the energy industry: Storage is often called the Swiss army knife of the industry because it can be flexed to perform different functions throughout the value chain, depending on the design and location.
    • Generation– renewables integration/firming (e.g. reserves solar energy, for use at night), microgrids, instantaneous power output
    • Transmission & Distribution (T&D)– frequency regulation, T&D asset deferral, congestion relief
    • Consumption– peak shaving, demand management, back-up supply
       
  • How storage is monetized: Given the flexibility in design and application, storage resources can be monetized through different models at scale.
    • Contracted revenue– a buyer pays the storage owner a fixed charge for its right to utilize the battery’s capacity and charging/discharging
    • Merchant revenue – selling energy from the storage resource back to the wholesale electricity market
    • License– provide ‘energy-storage-as-a-service’ or demand management services to customers

As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. Storage, especially when complemented with renewables, is proving to be the innovation that can address this need. Much progress has been made and today’s market dynamics and new policy structure will continue to push the storage market forward.

[summary] => [format] => full_html [safe_value] =>

At the end of March, Florida Power and Light (FPL) announced that the company will build the world’s largest battery storage system to complement its existing solar power plant, to begin operations in late 2021. The system will be a 409-MW/900-MWh battery storage facility, around four times the storage capacity of the world’s current largest battery system at the Hornsdale Power Reserve in Australia.

The U.S. energy storage market has seen a major expansion in recent years— the market nearly doubled in 2018 and is expected to double again in 2019. Large utility-scale projects like FPL’s, signal that the industry is maturing and solving operational and financial challenges that previously hindered large-scale deployments.

The Kleinman Center recently invited a panel moderated by Wharton Professor Arthur Van Benthem to speak to the trends and challenges of the energy storage sector. The panelists included:

  • Ravi Manghani: Director of Energy Storage, Wood Mackenzie Power & Renewables
  • Arjun Prasad Ramadevanahalli: Associate, Morgan Lewis Law Firm
  • Paul Reed: Director of Business Development & Account Management, Viridity Energy

Below are the key takeaways to share from this panel:

  • 10x growth: Energy storage is poised for a rapid acceleration of installed capacity, projected to grow more than ten times in the next 5 to 7 years. The growth is driven by several technology and market dynamics, including:
    • High utility demand charges– for commercial and industrial customers, peak demand charges (highest energy consumption rate at any time during the billing period) can compose 40 to 60% of their total utility bill. Storage is a key solution for reducing peak demand.
    • Net energy metering shifts– utilities are pushing back against buying excess energy generated from renewable sources at retail prices; thus, owners of renewable generators are better off storing the energy to be used at a different time than sell the energy back to the grid.
    • Declining system prices– the cost of lithium-ion batteries has decreased 85% between 2014 to 2018 and is continuing to decrease. The cost curve is similar to the ones from the solar industry in recent years.
       
  • Order 841: In a big step forward, the Federal Energy Regulatory Commission (FERC) passed Order 841 this year on February 28 as a mandate to Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to establish market rules for energy storage. These rules should allow storage resources to participate in the market as both a buyer and seller, enabling storage to compete against traditional fossil fuel burning resources such as peaking plants. Many regulatory issues are pending, including understanding the impact to the distribution grid from bidirectional flow, procedures to connect the devices to the grid, and transmission access charges.
     
  • The Swiss army knife of the energy industry: Storage is often called the Swiss army knife of the industry because it can be flexed to perform different functions throughout the value chain, depending on the design and location.
    • Generation– renewables integration/firming (e.g. reserves solar energy, for use at night), microgrids, instantaneous power output
    • Transmission & Distribution (T&D)– frequency regulation, T&D asset deferral, congestion relief
    • Consumption– peak shaving, demand management, back-up supply
       
  • How storage is monetized: Given the flexibility in design and application, storage resources can be monetized through different models at scale.
    • Contracted revenue– a buyer pays the storage owner a fixed charge for its right to utilize the battery’s capacity and charging/discharging
    • Merchant revenue – selling energy from the storage resource back to the wholesale electricity market
    • License– provide ‘energy-storage-as-a-service’ or demand management services to customers

As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. Storage, especially when complemented with renewables, is proving to be the innovation that can address this need. Much progress has been made and today’s market dynamics and new policy structure will continue to push the storage market forward.

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As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. A recent panel explored the state of today’s energy storage.

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As the demand for energy grows, there is a need for more reliable and cleaner sources of energy. A recent panel explored the state of today’s energy storage.

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Executive Summary

To maintain reliability, the electric power grid needs to always balance electrical supply with demand. While grid operators pay close attention to forecasting load (i.e. demand) and scheduling generation (i.e. planning for dispatch of generation supply) ahead of time, there will be short-term errors in load forecasts or unexpected fluctuations of power plant output. Because demand and supply need to be balanced almost immediately, these sudden changes necessitate instantaneous adjustments within the timeframe of seconds to minutes. So grid operators rely upon “frequency regulation” resources to correct for these small mismatches between supply and demand. Frequency regulation resources are paid to automatically adjust output according to the operator’s signal in order to respond to these short-term fluctuations.

Traditionally, centralized power plants (like hydropower, steam generators, or combustion turbines) have provided frequency regulation services. Following recent technological and cost improvements, energy storage technologies (including batteries and flywheels) have begun to provide frequency regulation to grid systems as well. In 2012, the PJM Interconnection (PJM)—the regional transmission organization that operates the electricity grid across 13 mid-Atlantic states and D.C.—divided its frequency regulation market into slow and fast components. Fast response resources included energy storage that could absorb or release power very quickly, and more traditional resources like natural gas-fired power plants that could ramp power up and down with a slight delay.

The fast frequency regulation product was initially designed to require resources to provide zero energy on net when averaged over 15 minute periods. This concept, where the cumulative energy input equals the cumulative energy output, is called “energy neutrality.” This design enhanced the ability of energy storage resources to respond to the grid operator’s frequency regulation signals by ensuring the storage resource had available capacity to offer. As a result of this design, a lot of energy storage investment occurred in the PJM region. As of August 2016, PJM accounted for 46 percent of the rated power (MW) of grid-connected battery projects operational in the United States (DOE Office of Electricity Delivery & Energy Reliability 2016). Recently, other regions such as California have seen substantial energy storage deployment.

Frequency regulation has played a large role in energy storage commercialization, and will continue to play a role. But how large a role depends on changes to the design of PJM’s frequency regulation market. PJM embarked on these changes in an effort to correct observed problems in the market. Specifically, some energy storage resources at some instances would be pulling power from the grid in an effort to achieve energy neutrality at the precise time the grid operator needed resources to be injecting power, and vice versa.

Starting in 2015, PJM embarked on a series of changes to its frequency regulation market to correct for observed issues, and more changes are being proposed. Changes implemented to date have resulted in reduced growth rates of energy storage resources in the PJM footprint. The energy storage industry perceives these market changes to be unduly unfair, and is challenging PJM through two complaints before the Federal Energy Regulatory Commission (FERC).

The underlying technological issue facing PJM’s frequency regulation system is that advanced energy storage units can provide quick and accurate responses in a short timescale, but cannot sustain this output for a long time. Consequently, PJM, the energy storage industry, and the Federal Energy Regulatory Commission (FERC) need to resolve a significant market design challenge: How should the market place different technologies on a competitive playing field when their technical characteristics differ fundamentally, all while protecting system reliability? 

This report will focus on the technological and economic aspects of PJM’s frequency regulation market design, while avoiding commenting on the legal nuances of the ongoing complaints. This report first discusses the importance of frequency regulation in relation to compliance with reliability standards. Then it provides an overview of how two central market design dimensions of the PJM frequency regulation system were created: the signal construction and the valuation system for these two different signal types. This article looks at the recent market design changes and seeks to examine their impacts on system reliability as well as energy storage providers. Finally, the article considers the future direction of how energy storage interacts with frequency regulation needs.

[summary] => [format] => full_html [safe_value] =>

Executive Summary

To maintain reliability, the electric power grid needs to always balance electrical supply with demand. While grid operators pay close attention to forecasting load (i.e. demand) and scheduling generation (i.e. planning for dispatch of generation supply) ahead of time, there will be short-term errors in load forecasts or unexpected fluctuations of power plant output. Because demand and supply need to be balanced almost immediately, these sudden changes necessitate instantaneous adjustments within the timeframe of seconds to minutes. So grid operators rely upon “frequency regulation” resources to correct for these small mismatches between supply and demand. Frequency regulation resources are paid to automatically adjust output according to the operator’s signal in order to respond to these short-term fluctuations.

Traditionally, centralized power plants (like hydropower, steam generators, or combustion turbines) have provided frequency regulation services. Following recent technological and cost improvements, energy storage technologies (including batteries and flywheels) have begun to provide frequency regulation to grid systems as well. In 2012, the PJM Interconnection (PJM)—the regional transmission organization that operates the electricity grid across 13 mid-Atlantic states and D.C.—divided its frequency regulation market into slow and fast components. Fast response resources included energy storage that could absorb or release power very quickly, and more traditional resources like natural gas-fired power plants that could ramp power up and down with a slight delay.

The fast frequency regulation product was initially designed to require resources to provide zero energy on net when averaged over 15 minute periods. This concept, where the cumulative energy input equals the cumulative energy output, is called “energy neutrality.” This design enhanced the ability of energy storage resources to respond to the grid operator’s frequency regulation signals by ensuring the storage resource had available capacity to offer. As a result of this design, a lot of energy storage investment occurred in the PJM region. As of August 2016, PJM accounted for 46 percent of the rated power (MW) of grid-connected battery projects operational in the United States (DOE Office of Electricity Delivery & Energy Reliability 2016). Recently, other regions such as California have seen substantial energy storage deployment.

Frequency regulation has played a large role in energy storage commercialization, and will continue to play a role. But how large a role depends on changes to the design of PJM’s frequency regulation market. PJM embarked on these changes in an effort to correct observed problems in the market. Specifically, some energy storage resources at some instances would be pulling power from the grid in an effort to achieve energy neutrality at the precise time the grid operator needed resources to be injecting power, and vice versa.

Starting in 2015, PJM embarked on a series of changes to its frequency regulation market to correct for observed issues, and more changes are being proposed. Changes implemented to date have resulted in reduced growth rates of energy storage resources in the PJM footprint. The energy storage industry perceives these market changes to be unduly unfair, and is challenging PJM through two complaints before the Federal Energy Regulatory Commission (FERC).

The underlying technological issue facing PJM’s frequency regulation system is that advanced energy storage units can provide quick and accurate responses in a short timescale, but cannot sustain this output for a long time. Consequently, PJM, the energy storage industry, and the Federal Energy Regulatory Commission (FERC) need to resolve a significant market design challenge: How should the market place different technologies on a competitive playing field when their technical characteristics differ fundamentally, all while protecting system reliability? 

This report will focus on the technological and economic aspects of PJM’s frequency regulation market design, while avoiding commenting on the legal nuances of the ongoing complaints. This report first discusses the importance of frequency regulation in relation to compliance with reliability standards. Then it provides an overview of how two central market design dimensions of the PJM frequency regulation system were created: the signal construction and the valuation system for these two different signal types. This article looks at the recent market design changes and seeks to examine their impacts on system reliability as well as energy storage providers. Finally, the article considers the future direction of how energy storage interacts with frequency regulation needs.

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Room filled with multiple batteries
Girish Sankar
December 17, 2019

In recent years, the falling costs and increasing capacity of lithium-ion battery technology have given rise to a proliferation of grid level energy storage. As prices continue to drop for batteries and other competing storage technologies—such as pumped hydro, compressed air, and reversible fuel-cells—we can’t ignore the need to create smart ways to pay for their installation and operation in the face of changing demand.

In a future with a renewable grid, energy storage will be used for more than just load balancing the grid from the day-to-day needs caused by our variable energy sources and different levels of customer demand. It could be required to potentially store large quantities of energy for periods of weeks to months to facilitate energy consumption during peak periods such as winter heating months. To enable the proliferation of renewable power, long-term energy storage will become just as important a service as short-term power supply.

Due to the fickle nature of energy demand and supply, these storage assets may or may not be used on any given day. Storage providers will need to be incentivized to build storage and be paid for it even if the resource is underutilized. If they aren’t, they will be unlikely to build enough storage capacity and the grid operator may be forced into the use of expensive, short-term peak power (with higher prices that get passed on to customers).

Bloomberg’s BNEF reports that the amount of deployed energy storage will multiply by 122 times, from “9GW/17GWh deployed as of 2018 to 1,095GW/2,850GWh by 2040” and this growth will be primarily driven by a halving of the cost of batteries by 2030. Moreover, there are many energy storage projects being built in conjunction with renewable power developments due to these falling costs and the ability to balance intermittency. Smart contracting for storage could help accelerate this deployment of utility scale storage assets. 

We reviewed a public request for proposal contract that was made available a few years ago by Southern California Edison (SCE), and found that this contract included three sources of income for an energy storage operator:

  1. An ongoing payment for capacity of energy (watt-hours) provided
  2. Compensation for operations and maintenance cost of the storage unit
  3. A multiplier to the payment, if the monthly utilization of the unit met certain requirements

Conversations with players in the battery storage space (such as AMS, which develops artificial intelligence to price and dispatch energy storage) have indicated that batteries also provide ancillary services like regulating the frequency of power. Tiny injections of stored power can help the grid and the individual electricity power markets to maintain their frequency (Hz) requirements.

Though these contracts seem fair at surface level, the key element to note is the utilization related payment. If we have to build more storage than is needed on the average day, we must also build extra storage for days with peak energy demand. 

Since this extra storage may not be utilized frequently, storage contracts should integrate a minimum payment scheme that gives a base payment to the operator no matter what the utilization rate of the battery is, and therefore ensure the operator is compensated appropriately for their investment. Unlike the SCE contract, there might be no penalty for failing to meet utilization requirements (unless there was a mechanical failure) and the storage operator could earn a bonus for high utilization. This would be a way to incentivize enough storage to be built to continue supporting the ongoing energy transition.  

Our blog highlights the research, opinions, and insights of individual authors. It does not represent the voice of the Kleinman Center.

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