Market regulators in the United States, United Kingdom, Germany, Australia, and other countries have been active explorers of models and mechanisms which allow distributed energy storage to participate in the wholesale electricity market. The experiences of these countries have provided references for other worldwide distributed energy storage markets to update their relevant market rules.
United States
The United States has taken many steps in both technical and market regulations to remove barriers for energy storage and distributed energy to participate in the power market. In technologies, the US Department of Energy released the Network Optimized Distributed Energy Systems (NODES) program, which provided funding to support the grid integration of virtual energy storage resources. The program has helped to develop a system that can flexibly regulate and optimize distributed energy applications such as energy storage, improving the grid’s ability to safely integrate distributed energy resources, and ensuring that the quality of customer electricity is not affected. In market regulations, the Federal Energy Regulatory Commission (FERC) released Order No. 792 in 2013, which simplified the grid connection process for small-scale generation equipment. In 2015, FERC released Order No. 745, which allowed consumer energy products and services to participate in the wholesale electricity market. Finally, in 2016, FERC begin to solicit proposals and comprehensively revise the rules on energy storage and distributed energy participation in the electricity market.
Below, we explore these power market regulations in detail.
In November 2013, FERC released Order No. 792, simplifying the grid connection process for small-scale generation equipment, including energy storage systems. During the policy development process, FERC conducted a seminar focused on resolving the issue of whether energy storage systems should or should not be classified as small-scale generation (equipment capable of generating electricity in accordance with grid connection regulations and agreements). In the end, FERC Order No.792 defined small-scale storage as the following: equipment which, after connecting to the grid, is able to generate/store electricity, and has an output power no greater than 20MW. Small-scale generation falling under this new definition includes energy storage technologies, thereby providing a foundation for the future of energy storage and creating a clear path for the identity and integration of storage in the grid under the jurisdiction of FERC.
In January 2016, the United States Supreme Court issued its decision on FERC Order 745, ruling that consumer energy products and services, including demand response, would be allowed to participate in the wholesale power market and collect compensation similar to conventional generation resources. The ruling allowed I&C and residential applications of renewable energy technologies to receive greater compensation, stimulating growth of solar PV, energy storage, energy management, and other new energy technologies. The ruling also increased the competitiveness of demand response, distributed generation, energy storage, and other new resources with conventional fossil fuel generation, helping drive down the costs of electricity.
Also in 2016, the California Independent System Operator (CAISO), the Pennsylvania-New Jersey-Maryland Interconnection (PJM), and the New York Independent System Operator (NYISO) submitted proposals to FERC, suggesting that it update its market regulations to promote greater aggregation of distributed energy resources to participate in power market transactions. In response to these proposals, FERC in November 2016 released a notice on proposed amendments, suggesting how to eliminate barriers to the participation of energy storage and distributed energy aggregation in the wholesale electricity market. The notice first provided a definition for electric energy storage, stating, “we define an electric storage resource as a resource capable of receiving electric energy from the grid and storing it for later injection of electricity back to the grid regardless of where the resource is located on the electrical system. These resources include all types of electric storage technologies, regardless of their size, storage medium (e.g., batteries, flywheels, compressed air, pumped-hydro, etc.), or whether located on the interstate grid or on a distribution system.” FERC addressed distributed energy systems by proposing that each RTO/ISO “define distributed energy resources aggregators as a type of market participant that can participate in the organized wholesale electric markets under the participation model that best accommodates the physical and operational characteristics of its distributed energy resource aggregation.” The notice provided suggestions on qualifications, capacity requirements, coordination between parties, contracting, and other subjects related to distributed energy aggregation in the power market. These subjects are shown in the table below:
Table: FERC suggestions for regulatory updates allowing distributed energy aggregators to participate in the power market
In February 2018, FERC released Order No. 841, “Final Rule on Electric Storage Resource Participation in Markets Operated by Regional Transmission Organizations, or RTOs, and Independent System Operators, or ISOs.” The ruling formally required RTOs and ISOs to establish wholesale electricity market models and market rules which recognize the physical and operational characteristics of electrical energy storage resources so that they may participate in RTO/ISO markets. FERC outlined four standards for market participation models and market regulations: 1) the model must ensure that energy storage resources are eligible to provide all of the technical services that they are capable of in the RTO/ISO markets (including capacity, energy, and ancillary services); 2) grid operators must be able to dispatch energy storage resources, and said resources must be able to set the wholesale market clearing price as both a wholesale buyer and seller in accordance with existing wholesale market price rules; 3) models must account for the physical and operational characteristics of energy storage resources through bidding parameters or other methods; 4) establish a minimum capacity requirement for energy storage resource participation in the market that does not exceed 100kW.
FERC also launched a new rule-making process to solicit suggestions for distributed resources aggregation. In April 2018, FERC held a seminar on distributed energy technologies to discuss topics including location requirements for distributed energy aggregation, distributed energy interconnection and grid access, the feasibility of distributed energy aggregation at multiple network nodes, double compensation of services, data and modeling of distributed energy, federal and state agency regulatory boundaries and coordination, and other issues. Following this seminar, FERC received more than fifty comments and suggestions. As of this writing, FERC is still in the stage of receiving and evaluating these suggestions to formulate the next work plan.
United Kingdom
Unlike the series of orders released by FERC in the United States, the United Kingdom’s Office of Gas and Electricity Markets (Ofgem) and the Department for Business, Energy & Industrial Strategy released the “Smart Systems and Flexibility Plan” (hereafter referred to as the “Plan”) in July 2017. The Plan promotes the construction of a smart and flexible energy system in the UK primarily through “removal of barriers to smart technologies (such as storage), enabling smart homes and business, and improving access to energy markets for new technologies and business models.” The Plan is the UK’s most important framework document for promoting energy storage in the energy market and solving key issues within the UK power system.
In order to reduce the threshold for energy storage and other flexible resources to participate in the market, the Plan proposes that the government should lower the market entry and management requirements for energy storage and demand response equipment, allow demand response providers to reallocate assets, and allow revenue stacking between the capacity market and ancillary services. Not long after the release of the Plan, many energy storage projects turned their focus to participation in the capacity and ancillary services markets.
In December 2017, the Department for Business, Energy & Industrial Strategy and the National Grid announced that the de-rating factor for 30-minute batteries would be lowered to 17.89% from the current rating of 96% in the T-4 capacity market, and lowered to 21.34% in the T-1 capacity market. An energy storage system with duration shorter than 4 hours would receive reduced compensation, leading to a shift in energy storage applications from the capacity market to the wholesale and/or balancing market to derive compensation from energy arbitrage.
In response to this market change and to eliminate barriers for distributed energy and other load-side resource participation in the balancing market, in May 2018, UK transmission operator National Grid released a report announcing relaxation of entry requirements for the balancing market. The report announced the creation of a new category of market participant, the “Virtual Lead Party,” as well as a new balancing market service provider, “secondary balancing mechanism units (SBMU).” SBMUs have a minimum size of 1MW, and can act independently or as aggregated resources. To simplify implementation, in the future the grid connection guidelines will be further revised and simplified, clarifying the process for aggregators to participate in the balancing market.
Germany
Germany was an earlier explorer of models such as “community energy storage” and “virtual power plants.” These efforts also revealed many obstacles to distributed energy storage’s participation in the power market. In recent years, Germany has also made efforts to modify its market regulations to allow distributed energy resources to more easily participate in the power market. Some of the most influential changes were the German Federal Network Agency’s updates to the bidding times and minimum bid size for secondary and tertiary frequency control.
Beginning in July 2018, secondary and tertiary frequency control bidding times were adjusted from a weekly to daily schedule. In addition, the auction times were modified from two 12-hour periods per day, to six 4-hour periods per day. Bidding was also modified to begin at 10:00AM a week before the delivery date, and close at 8:00AM the day before the delivery date.
Also beginning in July 2018, small-scale service providers that have obtained Federal Network Agency permission may provide secondary and minute control reserve services of less than 5MW (the previous minimum bid size). Such bids may include 1MW, 2MW, 3MW, etc. on the condition that in each frequency control area and delivery period, the provider only submits one bid for each frequency control product, thereby preventing large energy storage stations from breaking into smaller units to participate in bidding.
These regulatory adjustments have allowed operators of small-scale renewable energy systems, demand-side management systems, battery energy storage, and other systems the opportunity to participate in the ancillary services market. Daily bidding and a shorter service provision period have allowed available energy storage capacity to participate in more target markets, helping to increase avenues of revenue for aggregated storage capacity.
Australia
Australia has promoted the participation of energy storage in power market transactions primarily through regulatory changes that allow more open markets, maintain a fair and reasonable competitive environment, and create new market entity categories.
On November 24, 2016, the Australian Energy Market Commission (AEMC) released its “National Electricity Amendment Rule 2016” to "untie" ancillary services from the existing supply source system and open them to new market participants, namely, market-oriented ancillary service providers other than large power generation companies. After revision to the Australian frequency regulation ancillary services rules, market participants were allowed to provide ancillary services at one location, or can combine loads or generators from multiple locations together to offer services. The rule came into effect in July 2017, greatly increasing the opportunities for energy storage to participate in the ancillary services market, not only helping to increase the supply of frequency regulation service resources, but also reducing the market price of such services.
Among actions to create a fair and reasonable competitive environment In August 2017, AEMC released “National Electricity Amendment Rule 2017 (Contestability of energy services),” which took the following actions: 1) restricts the grid from owning or controlling behind-the-meter resources and allows consumers more control over the use of their assets; 2) restricts distribution system operators’ use of behind-the-meter resources to obtain unreasonable compensation (namely, compensation which has not been permitted by regulators). Distribution network operators should purchase these services from consumers or other energy suppliers; 3) improves the clarity and transparency of the energy regulatory framework, defines the scope of energy services subject to economic regulation, and defines the boundaries of the energy market opening; 4) stimulates and encourages market competition so as to foster the innovation and application of advanced energy solutions; 5) prevents distribution companies from maximizing grid benefits by restricting behind-the-meter resources from providing multiple services; 6) supports consumer use of market methods to choose energy supply methods. The Rule aims to protect behind-the-meter resources from unfair competition when participating in the electricity market by defining the ownership and control of behind-the-meter resources and clarifying which services behind-the-meter resources can provide.
In addition, AEMC is currently revising the rules, hoping to create a new market entity—the Demand Response Service Provider (DRSP)—so that demand response resources can directly bid into the wholesale market, providing the demand-side with greater and more transparent market opportunities. The creation of the DSRP would also invite more competition into the wholesale market to prevent artificially high prices and maintain power system stability.
Summary
With such a large amount of distributed energy storage scattered throughout the consumer side, many countries have confronted the challenge of aggregating distributed energy storage to participate in power market transactions. Countries such as the United States, the United Kingdom, Germany, and Australia have begun to eliminate barriers for distributed energy storage to participate in the electricity market by lowering market entry thresholds, creating new market entity categories, and opening more markets to distributed energy storage. However, distributed energy storage involves a number of variables, including technical equipment of different types, working conditions, and technical characteristics, as well as different market entities, such as energy storage equipment owners, aggregators, distribution companies, and RTOs/ISOs, and a variety of revenue categories, such as consumer bill management, energy markets, and ancillary service markets. With such a variety of factors, in the future, power systems must see greater coordination and optimization in technologies, market models, policies, and market rules to reach the goal of maximizing the value of distributed energy storage.
Author: Yue Fen Translation: George Dudley