Why FERC’s energy storage ruling is important

The Federal Regulatory Energy Commission recently passed a mandate to support energy storage technologies that can provide quick bursts of power to the grid to help it run more smoothly. This new rule could play a crucial role in nurturing the growth of the young energy storage market, though energy storage companies won’t be the only beneficiaries of the new rule. To break down what this new rule means for grid technologies, here’s our cheatsheet on the new rule and why you should care:
1). What is new? The new rule requires grid operators — called independent system operators or regional transmission organizations — to pay more to companies that can provide the fastest and most accurate frequency regulation services. The rule reflects the emerging use of non-traditional power plants to regulate the frequency of the grid, which runs smoothly when power flows through it at 60 hertz frequency. But electricity pours into the grid from different power plants at various locations, and it doesn’t neatly correspond with energy consumption all the time.
2). Why do we need a new rule? Historically, power generators would dial up and down the production of their power plants to help grid operators even out the fluctuations. The price they paid for frequency regulation is different than what they get for the steady supply of power. That’s because frequency regulation requires short bursts of power to respond to fluctuations that change in minutes or even seconds. It makes sense to price the power differently because it fulfills different roles. But there was no mandate to pay for frequency regulations based on the speed and accuracy of providing the amount of  power requested by a grid operator. Some grid operators take into consideration speed and accuracy in setting prices while others don’t.
The emergence of renewable energy generation has also brought more attention to energy storage. Renewable energy sources such as solar and wind don’t produce power consistently through the day or night, and their production doesn’t always coincide with peak demand for power. One way to maximize revenues is to bank the renewable energy and deliver it only when demand, along with electricity prices, rises – such as during hot summer days or when people return home in the early evening and turn on lights and appliances. Another way to make money is to sell power for frequency regulation.
Energy storage farm operators have lobbied for higher rates for their power and services because newer technologies can respond to frequency fluctuations more quickly than fossil fuel power plants can. Batteries are holding tanks for energy that are ready to dispatch power whenever there is a need. In comparison, fossil fuel power plants can spend more time and energy ramping up and down its production. This means that the power from fossil fuel plants may not meet the changing demand of the grid as accurately in real time.
3). Who benefits? Different types of cleantech business stand to benefit. As I mentioned, energy storage businesses, from technology developers to energy storage farm operators, particularly those using flywheels and batteries — that means companies such as Beacon Power (flywheel), A123 Systems (s AONE) (battery technology) and AES Energy Storage (s AES) (battery farm developer). Beacon Power recently filed for Chapter 11 bankruptcy and seeks to re-organize and continue its operations. AES just inaugurated the world’s largest lithium-ion battery farm, located in West Virginia, that uses 32 MW of A123’s batteries.
Companies in the demand-response space also could be winners. Demand-response service providers sign up large energy users, such as businesses, and pay them to reduce energy use to help utilities or grid operators balance power supply and demand. So they could do the same in the frequency regulation market by adjusting the energy use of their customers’ heating and cooling systems and other equipment. These adjustments are made for short durations, so their customers aren’t likely to notice a difference. Frequency regulation has been a tiny opportunity for demand-response service providers, according to FERC. But the new rule could make it more attractive for demand-response service providers such as EnerNOC (s ENOC).
If electric cars become popular, they could become a means of regulating the grid’s frequency as well, but who will benefit financially isn’t clear. Electric cars are essentially mobile batteries. When they are plugged into the grid for recharging, there could be programs to draw power from them to deal with frequency fluctuations. How much power can be taken out from the car battery and when are big issues because you don’t want to surprise car owners with lower-than-expected charged levels. There is also no standard, industry-wide practice for whether to pay the owners of the cars or the charging stations for sending power to the grid for frequency regulation.
4). What’s next? Grid operators will have to come up with rules and pricing for frequency regulation. The FERC rule mandates two compensations: one is a “capacity payment” for being ready and setting aside power to provide the service anytime. The second payment will be based on how fast and accurate they can deliver the service.
PJM Interconnect, the largest grid operator in North America, is ahead of others and drafted its plan while FERC was considering the new rule. It expects to implement the plan starting next year. Its territories, which include 13 state and Washington, D.C., is home to that new, 32MW lithium-ion battery project by AES.
Photo courtesy of AES  Energy Storage