State-federal concerns could dim FERC's landmark storage order
Wider access to a variety of markets has been hailed as the basis for energy storage growth, but jurisdictional issues could thwart an overarching solution.
The promise of the Federal Energy Regulatory Commission’s Order 841 as a vehicle to accelerate the growth of energy storage could be dimmed or at least slowed down by pushback from state and utility interests.
Several organizations have filed requests for rehearing or clarification on the order, which aspires to remove barriers that could inhibit the participation of energy storage in the capacity, energy and ancillary services markets operated by regional transmission organizations (RTOs) and independent system operators (ISOs).
The order, issued in mid-February, directs RTOs and ISOs to come up with new tariffs that would allow energy storage resources to provide multiple electricity market services.
FERC has sole jurisdiction over the wholesale markets of RTOs and ISOs, but in the Notice of Proposed Rulemaking that resulted in Order 841, FERC defined “electric storage resource” as all types of electric storage technologies regardless of “whether the resource is located on the interstate grid or on a distribution system.”
That definition touched a nerve. A range of entities have expressed concerns that FERC’s definition opens the potential for federal overreach into the domain of state regulation.
For decades, striking a balance between federal and state authority has been achieved under the legal theory of cooperative federalism, in which the federal government and individual states act as partners in drawing up and implementing policies. In the context of electric sector regulation, that theory has been tested in recent years in at least two FERC Orders, 719 and 745.
The issue is not academic. Advance enthusiasm for Order 841 has been hailed as a potential landmark in energy storage policy. To date, energy storage policy has been determined on a state-by-state basis. That has left large swaths of the national grid controlled by wholesale competitive markets uncertain or unclear when it comes to storage policies.
Those policies matter because the economics of energy storage, as they have been worked out so far, call for being able to use batteries to their fullest extent, that is, taking advantage of their ability to both inject and absorb power into and from the grid. (Absorption becomes more important as intermittent generation sources like wind and solar power become more widespread.)
But the rules governing the power sector were designed with a sharp distinction between generation and distribution in mind, and that definition does not easily accommodate the flexibility of energy storage.
From a business perspective, that lack of accommodation limits the scope of potential revenues and runs counter to one of the key business models of the energy storage industry — finding multiple uses for a single resource, often referred to as revenue stacking. But revenue stacking is often easier said than done. For instance, there are no consistent rules on how a distribution-tied storage device should be compensated for injecting energy into the grid: Should a storage device be paid at retail or wholesale rates?
That is one of the issues in a case pending before the Public Utility Commission of Texas (PUCT). American Electric Power wanted to install energy storage devices on its distribution grid instead of upgrading a transmission line or building a new substation.
Merchant generators and other stakeholders objected to AEP’s projects, arguing that the utility was removing opportunities from the market while being subsidized by ratepayers.
Generators also objected to the way that AEP had proposed to account for the energy it would use to charge the batteries. AEP wanted to account for the charging energy as “unaccounted for energy,” which is usually pooled, with the costs spread across all ratepayers. Generators said AEP’s treatment of charging costs would distort the energy prices and the operation of the wholesale power market.
The PUCT dismissed the AEP case and opened a rulemaking to "develop facts necessary to establish a regulatory framework" for energy storage.
Energy storage often has more leeway to operate in wholesale power markets, but distribution applications could be an essential ingredient if energy storage is going to reach its full potential, according to a recent report by The Brattle Group.
The report argues that Order 841 could lay the foundation for U.S. energy storage installations to grow five times to 50 GW over the next decade. But at least half of that potential would come from energy storage applications that serve the transmission and distribution sectors.
As in Texas, two of the key issues under scrutiny in Order 841 are which entities are going to be allowed into the market and how are they going to be paid. The idea of having an overarching federal framework would go a long way to smooth the path to a more rapid uptake of energy storage (even though the Texas market does not fall under FERC jurisdiction).
“The jurisdictional questions will be challenging to answer,” Judy Chang at Brattle told Utility Dive in an email exchange. Chang is a principal and director at Brattle and one of the authors of the storage report. Ultimately, solutions could have to be worked out on a state-by-state basis because each state may have a slightly different storage procurement regime and different parameters about how storage can be paid through the retail ratemaking process, Chang said.
Rehearing and beyond
Those are areas that some stakeholders consider fraught with opportunities for federal infringement on state turf. In a March filing, the National Association of Regulatory Utility Commissioners (NARUC), highlighted FERC’s claim that its jurisdiction extends to “wholesale market rules for participation of resources connected at or below distribution-level voltages.” That claim, according to NARUC, is “overbroad to the extent it can be construed to constrain State authority with respect to distribution facilities.”
NARUC does not take issue with FERC’s reasoning, which is based on a Supreme Court case, FERC v. EPSA. That case addressed issues raised in FERC’s Order 745, which deals with market operator payments for demand response commitments. The Supreme Court found that Order 745 was built upon Order 719, which required that wholesale market operators receive demand response bids from aggregators of electricity consumers except when state regulation bars such participation.
In upholding Order 745, the court found that wholesale demand response is “a program of cooperative federalism, in which the States retain the last word.” That feature, the court argued, “removes any conceivable doubt” about the allocation of federal and state authority.
NARUC’s issue with Order 841 is that while FERC is within its rights to determine how resources can participate in wholesale power market, it cannot determine whether resources participate in the RTO and ISO markets.
NARUC’s petition asks FERC to grant a hearing request to clarify that Order 841 “does not eliminate the States’ authority to determine whether a resource is able to participate in the RTO/ISO markets.” Failing that, NARUC asks that FERC defer a final determination on the issue until it can be addressed in a separate docket that FERC has opened, RM19-9-000, that was separated from the energy storage NOPR to deal with issues related to the aggregation of distributed energy resources.
In a separate filing, a group composed of American Municipal Power, the American Public Power Association, and the National Rural Electric Cooperative Association (NRECA), also is seeking a rehearing on Order 841 and calls for FERC to adhere to “the principles of cooperative federalism.”
The petitioners argue that Order 841 does not follow those principles and, instead, the order suggests that storage devices “on a distribution system or behind a retail meter may circumvent restrictions under state or local law on retail customers directly purchasing from, or selling into, the wholesale market — actions that are beyond the Commission’s jurisdiction.”
In addition to seeking a rehearing and having FERC establish a bright line between wholesale and distribution (state) jurisdictions regarding energy storage, the NRECA and APPA parties are asking the commission to include an opt-out/opt-in mechanism similar to what it established in Order 719 on demand response bids in the wholesale market.
The NRECA and APPA parties also ask that rules regarding energy storage located on the distribution network or behind a retail meter should not go into effect until after the pending rule (RM18-9-000) on aggregate DERs is finalized.
Speaking broadly on behalf of investor-owned utilities, trade group Edison Electric Institute also expresses concerns that Order 841 should take care to follow the principles of cooperative federalism. EEI also is seeking a rehearing of Order 841 and would like to see a framework that would allow state regulatory agencies to opt out of allowing “distribution-connected resources from participating in the wholesale market.”
“I would expect that the energy storage industry would challenge an opt-out, if FERC were to go that route,” Jennifer Key, a partner with Steptoe & Johnson, told Utility Dive.
It is possible that an opt-out provision could water down the force of Order 841, Key admitted, but the major effect of the opt-out would likely occur in places that would be less attractive for developers of energy storage projects; for instance, in states with low power rates that present fewer opportunities for using storage to arbitrage the difference between on-peak and off-peak rates.
The opt-out request is a frequent theme in many of the comments received on Order 841, and an issue FERC has encountered before. FERC is saying that energy storage resources are allowed to participate in the wholesale market, but are not obliged to participate, Ari Peskoe, director at the Energy Law Initiative at Harvard, told Utility Dive.
Peskoe said the parties seeking rehearing on the jurisdictional issues are misreading FERC v. EPSA, but their legal arguments suggest that they may want to take the issue up to the U.S. Court of Appeals for the District of Columbia Circuit, which hears federal regulatory matters. “I have a strong suspicion there will be additional filings on the jurisdictional issues,” Peskoe said.
This article has been updated to correct a quote that implied FERC had included an opt-out for distribution-connected energy storage resources in Order 841.
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