California ISO's long road ahead to turn storage into a transmission asset
Stakeholders generally welcomed CAISO's storage proposal, but developers and investor-owned utilities support opposing cost-recovery options.
Transmission deferral is one of the more cost-effective uses for energy storage on the grid, but it often lacks a clear path for implementation. The California Independent System Operator (CAISO) is working to correct that.
CAISO recently received stakeholder comments from a range of interests on the straw proposal for storage as a transmission asset it released in May.
While most stakeholders cheered CAISO for taking on the topic, the range of responses shows there is much more work to be done to incorporate energy storage into the California grid. Some stakeholders are wary of the proposal's potential to suppress competitive prices in wholesale power markets.
The objective of the straw proposal is "to determine a pathway for transmission connected storage assets providing a regulated cost-of-service transmission service to also provide market-based services and access market revenues, thus lowering costs and providing greater flexibility for the benefit of ratepayers," according to CAISO.
That is sort of like squaring a circle. In fact, the "unique challenges" that storage as a cost-of-service transmission asset poses dissuaded the ISO from pursuing the issue until the Federal Energy Regulatory Commission (FERC) issued a policy statement (PL17-2) in January on concurrent cost recovery for storage resources.
FERC’s statement was not intended to resolve all the issues around storage as a transmission asset, but it set the groundwork by saying it is "permissible as a matter of policy" for a storage resource to concurrently provide services at cost- and market-based rates.
FERC’s policy statement also laid out some of the issues that the use of storage as a transmission asset raises: the potential for double recovery of costs; the potential for cost-based rates to suppress competition in the wholesale power market; and the level of control an ISO or a Regional Transmission Organization (RTO) can exert over the storage resource while maintaining independence and not becoming a for-profit market participant.
One of the guiding principles in CAISO’s straw proposal is that market-based revenues can reduce the costs of the asset recovered under a cost-of-service contract, reducing the burden on rate-paying consumers.
CAISO said that certain issues, such as the methodologies it uses for transmission planning and the framework for its competitive solicitations, were beyond the scope of its storage as a transmission asset proposal.
"The main issue is not process, but accounting," Alex Morris, director of policy and regulatory affairs the California Energy Storage Association (CESA), told Utility Dive.
The heart of the issue
CAISO sets out the heart of the issue in the straw proposal, identifying two possible cost recovery methods:
- full cost-of-service recovery, less revenues earned from market transactions; and
- partial cost-of-service recovery with the remainder provided from market revenues.
In its comments on the straw proposal, CESA supports both methods and adds a third for consideration. CESA recommended that energy related to the operation of a storage asset be treated in a way similar to how energy losses on the grid, also known as unaccounted for energy (UFE), are now treated.
That approach was used in Texas in a case involving two storage projects proposed by American Electric Power. The utility said it wanted to account for the energy to charge the batteries as UFE, but staff of the Public Utility Commission of Texas rejected the idea until the issues could be studied in more depth.
Energy storage developer LS Power rejected CAISO’s first option in its comments, saying it provides no incentives for storage developers. The developer also said the first option opens the door for gaming the system because a developer could "make an assumption for higher market revenue and less reliance" on transmission access charges in order to secure project approval but would have no obligation to earn market revenues and would only collect the cost-of-service rates, leaving ratepayers to pay the higher costs.
Instead, LS Power backed CAISO’s second option, which calls for partial cost-of-service recovery combined with market revenues. LS Power acknowledged that predicting market revenues would be challenging but said that option could be facilitated if CAISO were to lay out ground rules to delineate when a resource would be obliged to be available for reliability purposes. The second option will encourage more competition, incentivize energy storage owners, address gaming concerns and lower costs for ratepayers, LS Power said.
San Diego Gas & Electric, however, takes an opposite stand, which is a reversal of its earlier position. The utility now advocates for CAISO’s first option as the most viable. That option puts capital cost recovery on an equal basis with all other transmission assets. The market rate-based payments under CAISO’s first cost recovery option pose too many unknowns, SDG&E said. Estimates of market revenues could be wrong, and SDG&E expressed concern that if market revenues were higher than expected, it is unclear whether and for how long FERC and the California Public Utilities Commission would support utility shareholders retaining all net market revenues.
SDG&E acknowledged, however, that the first recovery option does not provide an incentive for storage owners to maximize market revenues and said it is "worth considering" the proposal by the California Wind Energy Association under which the storage owner would retain 50% of market revenues earned during market periods when those revenues exceed the projections CAISO made in its selection process. The remaining net market revenues would be credited against the cost-of-service payments.
Southern California Edison also supported the first recovery option in its comments but, like SDG&E, expressed concern that some form of incentive should be retained. The utility advocated for full cost recovery with the potential for market based revenues, but said those revenues should be shared by storage owners and transmission customers, in the form of credits that would reduce cost-of-service payments. SCE objected to the second option, saying that it would "completely change the current transmission rate paradigm."
EDF Renewables also supported the California Wind Energy Association’s profit sharing approach, but was otherwise critical of CAISO’s two recovery options.
EDF-R said the greater the level of cost-of-service payments, the greater the share of market revenues ratepayers should be entitled to through crediting. EDF-R suggested that CAISO should use a traditional transmission asset to establish a benchmark against which cost-of-service payments could be based.
EDF-R also suggested that CAISO would be exceeding FERC directives by compelling storage owners to participate in the competitive market for a portion of their cost recovery.
The Independent Energy Producers took an even stronger stance against CAISO’s proposal to mix cost-of-service and competitive payments. "It is hard to envision a situation in which a resource that is receiving cost recovery in whole or in part from cost-based rates under the CAISO proposal would not suppress competitive prices in any wholesale markets in which it engages, including bilateral capacity markets," the organization said in its comments.
Not only does CAISO’s proposal risk interfering with wholesale competitive markets, it poses the risk that storage owners would be positioned to "game" bids in otherwise competitive wholesale markets.
Similarly, Boston Energy Trading and Marketing was critical of CAISO’s proposal, saying it fails to address concerns raised in the FERC policy directive about the suppression of competitive prices in wholesale power markets.
"Simply stating that because the market is already competitive and [storage as a transmission asset] resources would have little to no impact on market prices because they will charge and discharge at different periods is not sufficient evidence ensuring inappropriate suppression of market pricing will not occur," Boston Energy wrote.
Just because market rates would be credited back to the benefit of ratepayers does not mean they do not have an effect in the wholesale market, Boston Energy said. Nor does CAISO’s argument that the impact of market prices be minimal make sense, Boston Energy said. If the impact is minimal, it likely does not provide a sufficient incentive to pursue the trade in the first place.
At the least, CAISO’s straw proposal and its thinking on transmission issues and its eventual tariff filing "will help others think through this," Morris said. "The RTOs and FERC naturally will learn from the party that works through this matter the soonest."
CAISO is scheduled to issue a revised straw proposal by Aug. 14 and to present its final proposal to the ISO board on Nov. 14-15. CAISO is holding a public stakeholder working group meeting for the proposal on June 29.
Follow Peter Maloney on Twitter