In February, the U.S. Federal Energy Regulatory Commission (FERC) finalized a historic rule on participation of storage resources in the “ISO/RTO” wholesale electricity markets. ISO/RTO markets cover about two-thirds of the United States and are roughly analogous to the spot markets under development in several Chinese provinces. The ISOs/RTOs are independent entities that oversee the markets, act as the system operator—or “dispatch center,” as it is known in China—and administer transmission on an open-access basis to all wholesale buyers and sellers. The transmission assets typically belong to electric utilities, who turn over operation of these assets to the ISO/RTO.)

The FERC rule will foster a broadening of the ISO/RTO playing fields so that storage—and hopefully soon other distributed resources—will be able to compete directly with traditional resources such as coal- and gas-fired generators. The rule requires each ISO/RTO to make a compliance filing with FERC within the next nine months (roughly by the end of the year) outlining changes in tariffs and market rules to foster participation of energy storage resources, including small-scale storage on distribution networks or even on end-user sites (“behind the meter”). FERC will further consider distributed energy resources  more broadly later in the year, after addressing thorny issues around aggregation and other matters.

Overall, the storage rule is a very positive development. There are several important points for audiences in China who are engaged with spot market design and implementation:

  • Even though the first ISO/RTO markets were implemented in the United States in the late 1990s and early 2000s, ISO/RTO officials and stakeholders continually examine market conditions and consider changes to market and tariff rules according to evolving power sector technologies and conditions, such as the emergence of new technologies like storage and the challenges of integrating variable renewable energy. The job of market design is never done.
  • The FERC rule requires that each ISO/RTO revise its tariffs and market rules to take account of storage-specific characteristics. In particular, the rule specifies 13 “physical and operational characteristics of storage resources,” including characteristics related to state of charge, charge time, charge/discharge limits, run time, and charge/discharge ramp rate. In short, the ISOs/RTOs will now have to plan and optimize their dispatch around a more realistic picture of the operating capabilities of storage resources. This should help improve the efficiency of markets and the physical operation of the grid.
  • At the heart of the FERC ruling is a commitment to remove barriers to storage resource participation and allow storage resources to compete to sell all grid services—energy, various ancillary services, and capacity—according to each resource’s full technical capability. It is clear that FERC recognizes the range of valuable services storage can provide. At the official release meeting, FERC staffers noted: “Participation [of storage] in the energy markets as a buyer and seller can reduce stress on the system by both shifting load away from peak conditions and reducing overgeneration during low load conditions. … Electric storage resources are also well suited to provide services like frequency regulation and ramping services, which are a first resort on correcting system frequency and helping to avoid contingency events.”
  • Other possible benefits from greater participation of energy storage in ISO/RTO markets include avoided capacity payments, lower peak prices, reduced cycling of fossil-fueled generators, management of net load ramps, minimized generator start-up and shut-down costs, and absorption of over-generation.
  • Another key principle underlying FERC’s rule is the importance of operating all available resources in a fashion that minimizes overall costs. The document points out that failure to level the playing field for storage and other resources “can reduce the efficiency of the ISO/RTO markets, potentially leading an ISO/RTO to dispatch more expensive resources to meet its system needs.”
  • Existing barriers to storage participation in ISO/RTO markets have included high minimum capacity thresholds, restrictions on aggregating storage assets, and stringent rules on serving capacity markets.
  • The new rule requires that storage resources as small as 100 kW must be able to participate individually in all markets (e.g., energy, capacity, and ancillary services). Energy storage companies that buy energy from the ISO/RTO for charging are to pay the wholesale locational-marginal price.
  • Storage resources smaller than 100 kW, meanwhile, should be able to participate through aggregators—although FERC delayed judgment on a proposed rule that should move aggregation models forward and open up participation in ISO/RTO markets to a wider range of resources, potentially including distributed solar.

In line with the usual FERC process, the rule was issued after a lengthy and open public comment period on the draft rule FERC issued in November 2016. The document FERC published in February contains consideration of and responses to input from various stakeholders, including storage developers, consumer groups, utilities, and traditional generation asset owners. FERC pledged to further consider distributed energy resources in a public technical forum in April.

As various Chinese provinces move ahead rapidly with spot market design, it is worth reflecting that the U.S. and other countries are working on reviewing and updating their market models to grapple with the challenges of variable renewable energy integration and to even the playing field for all resources. Emerging storage technologies have the ability to provide flexibility services that should be very valuable to markets in this new era. But markets need to be designed to recognize, reveal, and reward these abilities and services. The spot markets under development in China have a window to leapfrog the models in place in the U.S. and elsewhere—and implement these design elements from the initial stages.