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.
Andy Stone: Hello and welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m your host, Andy Stone. The U.S. electricity system is undergoing rapid change with wind and solar making up a growing percentage of the energy mix. In fact, renewables accounted for more than 60% of the new generation built in the U.S. in 2016, yet renewables aren’t the only technologies changing today’s electric grid. In the last few years, interest has grown in energy storage, such as lithium-ion batteries, that store and inject energy into the grid. Some believe that storage can address some of the challenges to integrating renewables, such as intermittency and over generation.
But potential benefits aside, it’s not clear that today’s electricity markets are organized in ways that encourage the participation of storage and other new technologies. Market rules can influence investment into these new technologies and the rate of their deployment. Recently, the body that regulates wholesale electricity markets, the Federal Energy Regulatory Commission, also commonly known as FERC, proposed rules that could change energy markets and further support the growth of storage and other distributed technologies. Here to talk about the proposed rules and some of their implications is today’s guest Ken Kulak. Ken, welcome to the show.
Ken Kulak: Thank you.
Stone: Ken is a Senior Fellow at the Kleinman Center and a Partner with the Morgan Lewis Law Firm, where he advises clients on renewable energy issues, energy markets, and a variety of energy regulatory proceedings and transactions. Ken, today’s issues a timely one. So let’s just jump in with the questions. Can you introduce what’s unique about storage within the context of the electricity system and why its capturing the attention of regulators and investors?
Kulak: Sure. First of all, storage has been around for some time. We have technologies like pumped-hydro, where we move water up to a storage facility and then let it down at another time when we need that energy. What’s happening now is we’re starting to see a number of other storage technologies able to participate in the market at a price that makes them potentially attractive. And what those actual deployments look like is very interesting. Primarily lithium-ion based batteries have been coming to the market in the area of the mid-Atlantic states, an area that actually is a 13 state region coordinated by a regional transmission organization, known as PJM that has to balance the electricity generation and the demand for electricity across that entire region on an instantaneous basis, as well as California. That’s been trying to bring a lot more renewables onto the grid and is also establishing requirements for storage to come onto the electric grid.
Those opportunities are creating actual deployments. And so that, seeing how these are working and how energy storage is actually contributing to the grid has sparked a lot of interest. Developments are also occurring behind the meter for customers who are looking to save energy, if they can have storage reduce their demand at particular times under the existing rules of many utilities, that can be obviously economically beneficial for those particular customers. But it’s important to remember storage starts from a very small level of deployment. This growth has created some dramatic percentages and so that’s also getting people very interested. When we look at the kind of year over year deployment, even though it’s very small, it’s very large from a percentage perspective. That’s attracting investors. And the growth is continuing with a continual decline in technology prices. And that’s giving people the view that this may in fact, be able to scale more quickly than might otherwise have been anticipated just a few years back. People sometimes analogize it to the early years of solar deployment in the mid 2000s. When we saw solar relatively small, and then suddenly that combination of deployment and price, declines, and innovation, on the policy side and on the financing side, really drove a deployment across the, across the country.
Stone: So what’s policymakers interest in all this?
Kulak: From a policy perspective, there’s broad interest in modernizing the electric grid and facilitating the greater participation of both renewable and distributed energy resources. And policymakers are trying to figure out how storage fits within that framework. But there’s a lot of interest because there is that potential to address intermittency of renewable resources, but there’s, that’s only one value stream. There’s also the possibility of reducing the need for investment, where storage, if deployed properly, could potentially reduce peak demand. And perhaps even to go much farther where if our current, because our current grid has very little storage, and we’re always requiring the balance of generation and load. And if we can change that, the economics can be very interesting.
So when you combine these actual deployments, the falling costs, the new regulatory interest, it starts to look like a market that’s really poised for growth with potential to solve some very difficult aspects of power markets and distribution systems. And that’s what’s really unique about this interest but, as we sometimes say in the energy markets, it’s not really unique, we’re just at a different stage now where a lot of other things are coming together to create a great deal of interest and opportunity.
Stone: Okay. The proposed FERC rule would pave the way for storage and other technologies to participate in wholesale electricity markets, as you’ve mentioned. What range of technologies does the order address specifically? And what does the order say about the barriers those technologies face in participating in electricity markets?
Kulak: That’s a really good question. It’s hard to understate the importance of this FERC rule. Just by way of background, our listeners should understand that, you know, FERC’s responsibilities include jurisdiction over the wholesale sales of electricity. What we call sales for resale to the ultimate customer, and the transmission of electricity. So FERC really does kind of set the rules of the road, if you will, for these markets. And states in turn have responsibility for retail sales, the sales directly to customers who consume energy, as well as, typically, the jurisdiction over local utilities.
So this interaction between federal and state jurisdiction is actually quite complex. And this rule is right in the middle of that. In fact, the Supreme Court looked at two cases in the last year, and storage’s ability to participate both in front of the customer meter, delivering energy to the grid as a whole that I explained, as well as behind a customer’s meter to address a customer’s particular usage and profile, is a real important backdrop to the FERC’s rule here. Because we’re looking at that whole world together, even though FERC’s jurisdiction is just on the wholesale side.
Stone: So has FERC been involved with storage issues before this?
Kulak: This is not FERC’s first foray into the rulemaking on storage. Over the last several years, FERC has been putting out other rules that address storage participation in organized markets in one form or another. The one that particularly people pay a lot of attention to is frequency regulation, which is a kind of service in which a generator responds really quickly to the need to balance the grid. And storage, in the battery form and in flywheel form and other mechanisms, has been a very interesting factor in being able to instantly deliver that energy more quickly than some other facilities can.
FERC also held a technical conference last year where it explored a number of these technical and policy issues and issued a series of data requests to the entities that operate these power markets to try to understand what was happening with storage and that has led to this rule. So it’s bringing together a lot of different things that have already happened in one pretty large box. At the heart of the problem of what FERC is trying to do in this rule is looking at what the need for rules are that really will capture the characteristics of storage without trying to shoehorn storage into a kind of regulatory framework that it wasn’t designed for. And how that may limit the contribution of storage to organized power markets. And that’s what FERC is really trying to address.
Stone: Is FERC looking to push any particular type of storage technology?
Kulak: In terms of technology FERC isn’t really picking a particular type of storage. It defines an electric storage resources just as a resource capable of receiving electric energy from the grid and storing it for later injection of electricity back to the grid. They’re in some ways being technologically neutral, if you fit within that definition, that could apply to batteries, to pump storage, to whichever sort of technology will have those characteristics.
Stone: Can you define to me a little bit what these characteristics are that you’re talking about when they’re taking these characteristics of storage into account?
Kulak: Sure. One of the things that we look at is kind of what the actual market might be now, or the different markets that may exist. One is what we call demand response, which allows a customer to effectively be paid for reducing its load on a hot summer day. The University of Pennsylvania participates in these markets. On a hot July day when everyone has their air conditioning on, there is value to being able to reduce load. So we don’t have to add more generation to the grid. And so various entities reduce that load and are compensated for providing that service to the grid.
Storage could help with that. You could have a battery behind the meter at your facility. So that saves up some energy that you might need on those hot days. So you don’t have to reduce your load as much. But that’s not all storage can do. Storage could also be injecting electricity into the grid. So, but that doesn’t really fit within the demand response framework. So we’re trying to figure out, and what FERC’s rule is trying to address, and directing the entities over which it has jurisdiction to wrestle with, is what that storage ability to both inject electricity into the grid and save it for later, how we take all of those technical characteristics and bring those back into the rules that are going realize all the potential benefits of storage.
Stone: So it’s a framework for a technology that not only consumes electricity, but provides electricity and that’s unique also?
Stone: What type of changes does FERC propose?
Kulak: At the heart of the rule is a requirement that each regional transmission organization and independent system operator create a, what they call a participation model. And that’s to accommodate the characteristics of storage that we’ve been talking about and doesn’t limit storage to participating in just one type of the different markets that the energy operator manages. So there’s a, typically a market for energy that we actually will be using. There’s a capacity market that is the capacity to produce that particular energy at a particular time, there’s ancillary services, like the frequency regulation that I talked about earlier. All these are sort of different markets with different rules. And so FERC is looking to break down some of those barriers to having storage participate in those different markets, as opposed to being shoehorned into one or another. And as part of that participation model, rules are going to have to be developed that, so that storage participates properly, fully, consistently with other resources that are also in that market. So there’s a lot to both figure out and balance and address. And so there’s notice, this rulemaking is really about bringing those questions and potentially answers to the floor.
Stone: What is the position of the market operators such as PJM, which operates here in the Pennsylvania area?
Kulak: Well, first I think it’s important to recognize that the organized electric markets have already been really leading in this area. In some ways we’re having this conversation because the success of these markets and integrating storage to date has led FERC to be taking the steps that it’s taking. The market operators are developing their positions, the response to this FERC for notices due February 13th of this year. So little less than a month from now. So we’ll see what they believe in response to the rulemaking then. I can’t predict where they’re going to come out, but it’s worth noting that there’s going to be different approaches from the different organized markets around the country, based on their existing tariffs, their market operations, who’s already participating in those markets.
And I’d expect there to be a number of issues that they’re going to identify for further clarification and potentially investigation by FERC. Particularly with respect to bidding parameters, you know, how should storage be bidding into the market because these markets operate, you know, typically a day ahead market. So they plan for the energy and load that’s going to be dispatched in the next day, as well as a real time market. That happens obviously in real time. So what should the rules be for a technology that both injects energy into the grid and takes that load and how, when should it be charging? How should those rules all be worked out and recognizing that we also want to give flexibility to those market participants to operate their facilities as efficiently as possible.
Stone: You said when it should be charging windows, storage resources should actually be taking electricity in from the grid, right?
Stone: Why is that an issue?
Kulak: Well, part of the economics of storage is when are you going to charge the facility? It’s not just instantly there. This is a battery and for those of you who may not have seen this, you know, these look like boxes in a field. If the sort of storage facilities that are being interconnected with the grid and those are just not always on always full, they have to be charged. And so when you choose to charge that, facility’s also gonna determine when you might be available to provide that energy back into the grid. And that can be a pretty sophisticated determination. It’s almost really, it’s a kind of buy, sell dynamic where you’re buying the energy to charge that facility and then wanting to deliver it at the maximum time. And we’ve already seen, as people are participating in this market, figuring how to do that doesn’t always align with the models as people imagine how you do that.
Stone: It sounds like the stock market buy low, sell high.
Kulak: I have no opinion on the stock market but there’s certainly always challenges and no one wants to predict what interest rates are, what the price of energy is gonna be, too much further into the future.
Stone: Is there a precedent for exchanges, for example, is FERC modeling its rules on what some electricity markets have done today?
Kulak: Sure. They’re looking at how the rules have operated to date and wanting to figure out how best to take the best of those rules and integrate this into the FERC requirements. I think there is a concern about wanting to avoid patchwork rules all around the country. That is, I think, what has been happening to a certain extent and certainly when FERC takes it on, there’s going to be an effort to address that they’re establishing requirements for all of these markets. But I think they’re also going endeavor to give those markets some flexibility. Of course, what happens in this situation is when FERC promulgates a rule, the market operators file, make a compliance filing, FERC is going to review that as well. So it’s an iterative process that can advance to a certain commonality, but we’ll certainly see some variations. And that commonality is pretty important because if you’re an investor looking at this market, if you’re a customer, perhaps with national facilities, these are, it’s important to have real consistency in the rules. We’ve seen a lot of variation in different markets in the renewable space. We’re going to have to see how that plays out in the storage space as well.
Stone: Okay, let’s go a bit deeper into this idea of aggregating distributed energy sources, resources, which is kind of the second part of this, of this proposal. Does this mean that owners of rooftop solar will be able to sell their electricity on the wholesale market through aggregation?
Kulak: You know, it’s funny, storage has received the headlines here, but I actually think that what FERC is doing in the rule with respect to distributed energy resources is at least as interesting and may have even more transformative effect. Essentially FERC is directing the regional transmission operator organizations and the independent system operators to define distributed energy aggregation and the aggregators who can pull together all these small resources. Solar’s just one, there’s lots of different sort of possibilities here. And be able to dispatch those distributed resources as another market resource in an organized way.
Now, just as FERC directing the grid operators to figure out what the right participation model is for those distributed, those storage resources. So too, they’re being directed to find out the participation model for these aggregated distributed energy resources. As you think about it, that is probably even harder because we’re trying to figure out what different distributed resources are going to be able to do. How do we treat them fairly, consistently? How do we take into account their particular technical characteristics to be able to come up with appropriate rules for their participation as well?
Solar is an interesting one of those distributed energy resources, because if you have solar on your roof, you have paid a lot of attention to what the local rules are for interconnecting that solar and for what compensation may or may not be available on a hot July day. If you have more energy being generated by your solar panels or not. Those sorts of questions are going to apply across the different distributed energy resources that could potentially be aggregated here. And to think about some of the questions that FERC is looking at in this rule, you know, how do you compile a list of the eligible resources that can be aggregated? Who can be the distributed aggregator? What is that distributed aggregator, energy resources aggregator, doesn’t deliver the resources that they committed to under the market rules? How is that supposed to be played out?
Even when it comes to geographic limitation. You know, these organized markets are typically organized around particular nodes where energy is priced. And those nodes take into a lot of different factors, or a lot of factors are taken into account with respect to how constrained the area is, what sort of transmission and other issues are available. Do we need to have that same rule for distributed energy resources? That’s one of the questions that FERC has asked. Do they have to, can they be over a wider area? How are these supposed to be actually aggregated and then priced? So these go to some pretty fundamental questions around how markets are currently structured and if they should be open to these sorts of resources and how.
Stone: Could you potentially get an aggregator with a national scope?
Kulak: I don’t think we’re talking about a national scope, but it’s possible to imagine it being a geographic scope that’s broader than the way in which the organized market may be pricing electricity to particularly geographic point. That’s one of the questions that FERC has asked and I’m going to be very interested to see what sort of answers we get from the range of stakeholders that are participating in this. You know, part of this is also happening in this broader discussion of modernizing the electric grid and really facilitating greater participation. We talk sometimes now about customer generators or recognizing that customers may be more active in producing their own energy in one form or another.
And you know, again, many of storage having extraordinary potential here, but there’s this whole question of, you know, what are the rules supposed to look like that customers are going to understand too? And of course, that’s something that state public utility commissions are very focused on and figuring out what the rule should be between what should be on the FERC side of the fence, and what should be on the state side of the fence, is a pretty critical question. Moreover, one of the things that FERC is very focused on is the local utility. How should the coordination now happen between the grid operator and the local utility? If we’re talking about distributed energy resources that are behind the customer’s meter. The local utility has a critical role to play there. And FERC is also asking for comments about what that coordination should look like.
Stone: It’s very interesting. Just taking a step back here for a moment. This means potentially homeowners with rooftop solar could participate in the wholesale electricity market, correct? Through aggregators?
Kulak: FERC has opened up the idea of aggregated resources participating in the energy market. Now there’s lots of reasons why people don’t do that now because it’s hard to be a wholesale provider.
Stone: Well also you’re getting a higher price. if you’re getting the net meter rate, if you’re getting something that’s tied to residential or distribution rates, right?
Kulak: That very much depends on which particular jurisdiction you live in. And there’s a lot of questions around net metering, and those are getting worked out through a number of state jurisdiction at this point. But there’s aggregation question. I think it’s a bit open, you know, is it really going to make sense for us to aggregate all these small, small rooftops? And that’s not just a grid question. Who’s gonna do the aggregation? You know, are you going to, is it going to be the solar providers? It may make sense. They already, many of them own those systems through a power purchase agreement. They own the system on the homeowner’s roof. The homeowner doesn’t own it herself. And so how that structure matches up with the existing financing and ownership structures for these systems, we’re going to see.
Stone: Today’s podcast is with Ken Kulak, Senior Fellow with the Kleinman Center for Energy Policy and a Partner with the Morgan Lewis Law Firm. We’re discussing proposed changes to wholesale electricity market rules that could increase demand for energy storage and distributed clean energy. When might we see these rules going into effect?
Kulak: It’s going to be awhile. FERC will need to consider the comments that come in next month and then issue a final rule. The grid operators will then have six months to develop a filing that complies with that rule. And then that wouldn’t take effect for a year. And those deadlines that I just mentioned are also subject to comment in the rule. So it’s very hard to predict what the actual timeframe might be, but I don’t think FERC’s kind of sit back here. And I also don’t think that the grid operators are necessarily sitting back, they’ve already been innovating and they have a lot of other things that are happening that are encouraging them to be figuring out this space as well, and doing, continuing to innovate in some of the ways that they have today.
Stone: What changes might we see in investment and innovation if the rules go into effect?
Kulak: Well, as I explained, there’s a lot of different drivers here that have advanced us to this stage and would further advanced both investment and innovation. It’s still a very small market but if the rules that are developed as I think FERC seems to be envisioning where we’re maximizing the participation of storage and aggregated, distributed energy resources to the level that they are technically capable of, even if that may vary across the different types of resources, that’s pretty extraordinary. And if prices come down in a way that we really converge around open market opportunities, declining prices, I think that could be a very significant stimulus to growth. But it’s going to take the right policies to all be aligned both at the federal and state level. And then it’s also going to have to have enough certainty that investors are ready to come up, not just the ones that are ready to invest in a storage company or a particularly new project, but that we can really get to larger scale. And that requires a solid policy framework that you can build on.
Stone: Are there any additional issues, stakeholder concerns, that FERC may be looking into as it weighs the feedback that it gets?
Kulak: I think there’s actually some concerns that FERC already identified. So for example, when we look at distributed energy resources, if those are already participating in the local, getting compensation from the local utility, for example, should they be getting compensation in the wholesale market? I don’t think FERC thinks that. I don’t think the local utility will probably think that either. We don’t want to have double compensation for the same service. So sorting out those sorts of issues are, again, going to be ones that FERC is asking for comment and I expect there’s going to be particularly interesting to stakeholders. I think there’s also going to be some concern around just, as I suggested, the reliability, are these people actually going to provide the service that they’re committing to do? And figuring out how that actually gets sorted out and what the rules for compliance and the penalties for noncompliance are going to be are certainly going to be of interest.
Stone: What do you think FERC expects in terms of the possible effects on the grid and its reliability, if the rules are enacted or the rule is enacted, and what other hurdles do you think may need to be addressed in the future?
Kulak: I think for believes that the NOPR can significantly advance and accelerate deployment of storage and DDRs, which in turn can lead to a more efficient energy and capacity markets with enhanced reliability and hopefully lower costs for everyone. I don’t think there’s any illusions that this is going to happen overnight. It’s not. In the future, I think that there’s going to be a real focus on getting the compensation right. Aligned with what storage and aggregated distributed energy resources can really deliver in terms of performance and sorting out the responsibilities between FERC and the state commissions regarding the regulation of these resources. We certainly aren’t done yet.
Stone: Ken, thanks for appearing on the podcast.
Kulak: It’s been a pleasure.
Stone: Before finishing, I’d like to add in a note on today’s subject for our listeners. As we finished recording this podcast on January 19th, 2017, the Federal Energy Regulatory Commission released a policy statement, addressing another important aspect of integrating energy storage into electricity markets. In a nutshell, the policy statement presents FERC’s views on the ability of storage to earn two types of revenue and the potential conflicts this could cause.
As Ken explained, the proposed rulemaking would pave the way for storage and distributed energy resources to participate in energy markets. But the FERC and some in industry have raised concerns around the ability of stores to earn two types of revenue, one based on cost of service and another tied to markets, which might give storage an unfair advantage in competitive markets. In short FERC states said it is very concerned about double recovery and wants to avoid it. What is permissible is having two types of revenue, but not getting paid twice for the same service. One possible solution that has been proposed would involve the crediting of market revenues back to cost-based rate payers though other solutions may exist.
Our guest has been Ken Kulak Senior Fellow at the Kleinman center and a Partner with the Morgan Lewis law firm, where he advises clients on energy market and regulatory issues. And thanks to our listeners for tuning into Energy Policy Now from the Kleinman Center for Energy Policy at the University of Pennsylvania. If you enjoy this podcast, please get the word out to friends and colleagues by giving Energy Policy Now a five-star rating and review on iTunes. And keep up to date on the latest research and events from the Kleinman Center, by visiting our website, www.kleinmanenergy.upenn.edu.