Energy Storage in PJM: Exploring Frequency Regulation Market Transformation

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.

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

Thomas Lee

Research Assistant

Thomas Lee is a graduate of the Jerome Fisher Program in Management and Technology, where he obtained dual degrees in economics and computer science, and an M.S.E. in electrical engineering. He was a research assistant at the Kleinman Center.