POWER February 2020 - 20

LEGAL & REGULATORY
Joe Hall, Kyle Wamstad, and
Dan Nugent
T
Energy Storage-
Operational Versatility
Causes a Regulatory
Identity Crisis
he next decade could belong to energy storage. Project
development costs are dropping. Enhanced state and corporate
focus on climate-related issues is producing more
opportunities for renewable generation and for firming renewable
intermittency through energy storage.
The ability to apply non-recourse financing to energy storage
projects at the company level is following the growth of off-take
and market opportunities. From an engineering perspective, energy
storage could represent the pinnacle of multi-dimensional
solutions to complex generation, transmission, and distribution
problems for integrated resource planning and organized market
design, because energy storage resources can shift between
serving generation, and transmission and distribution roles, on
the bulk power system.
The technology's versatility, however, has produced a regulatory
conundrum that forces energy storage projects to search for
a raison d'etre. Project developers must consider an existential
question-Are they generation? Transmission? Distribution? The
answer is critical because current guidance on cost recovery from
the Federal Energy Regulatory Commission (FERC), state regulatory
commissions, and regional transmission organizations (RTOs)
arguably prevents storage projects from serving multiple roles.
This problem exists despite extensive efforts to promote the
full potential of energy storage technology. Stakeholders have
filed thousands of comments to FERC, to state regulators, and
to RTOs, advocating collaboration and innovation to allow energy
storage to reach its operational potential, including serving
multiple roles on a power system. An important part of these
discussions is cost recovery.
In response to stakeholders, regulating entities have been
cautious about establishing consistent, industry-wide rules on
cost recovery for energy storage dispatched interchangeably as
a generation-transmission or generation-distribution asset. To
be fair, regulatory entities must establish market structures that
produce just and reasonable wholesale and retail power rates.
In the multi-use energy storage projects reviewed by FERC to
date, payments for transmission and distribution have been on
a cost-of-service basis, and payments for market services are
based on market rates.
It is difficult to reconcile two cost-recovery mechanisms for
the same asset providing different services to the grid. Regulators
and organized markets cannot allow developers to " double
dip, " that is, to recover twice for the same capacity and operating
costs. Regulators and organized markets also cannot allow
storage projects to use their cost-of-service rate revenues
to subsidize " low ball " bids for sales of capacity and energy in
competitive markets.
FERC, therefore, has proposed crediting revenues received
from the sales of market services against cost-of-service revenue
requirements received for transmission service. Additionally,
FERC has required market participants to demonstrate their ability
20
to recover costs under a cost-of-service tariff that does not create
an unfair subsidy when making market sales. It's helpful guidance,
but FERC has created a " chicken-and-the-egg " issue. FERC generally
will not review a petition seeking guidance on cost recovery
unless an energy storage project is sufficiently advanced through
development, but a project will not progress through early-stage
development unless it has certainty of cost recovery.
What are storage developers to do? Rely on revenue use cases
based solely on a transmission or a generation role, ignoring
the versatility of the resource? The current regulatory environment
probably requires this choice for many projects.
For storage as transmission/distribution (T/D), this means presenting
a cost-effective alternative to a T/D upgrade and competing
for congestion relief projects in RTOs. Deploying an energy
storage resource for congestion relief means congestion relief
must take priority over market service dispatch, even when the
market service is potentially more lucrative. The obligation to prioritize
congestion relief when serving a T/D function could inject
enough uncertainty into a revenue stream to complicate project
financing. Conversely, the developer can go the generation route
and dispatch into a particular wholesale or retail market, forgoing
transmission or distribution revenue-which could leave congestion
unmitigated in the most cost-effective manner.
Without more reliable guidance from FERC, RTOs and states
likely will need to lead the discussion on how best to use energy
storage. Midcontinent Independent System Operator (MISO), for
example, has instituted stakeholder processes to evaluate how
energy storage projects should be included in transmission planning
versus as a resource applying for generation interconnection.
In December 2019, MISO filed a " storage as transmission-only
asset " proposal at FERC, establishing a framework for storage
to be evaluated on a comparable basis with transmission investment
in the MISO transmission planning process, though it would
restrict selected storage assets to a transmission-only role. This
restriction ultimately must be reconciled with MISO's distributed
energy and storage-related compliance obligations, which require
storage to be able to participate in MISO markets. The December
filing explains that MISO is working with stakeholders to develop
a process allowing energy storage to shift roles.
Whether led by FERC, RTOs, or states, establishing mechanisms
that balance efficient market interests while ensuring
adequate access for energy storage resources to serve roles
in generation, transmission, and distribution is the difference between
fulfilling and squandering the potential of energy storage
resources. Energy storage will have a place in organized markets
and state resource plans over the next decade, but its importance
is dependent on several factors, including cost recovery.
The hard reality is that the current regulatory environment limits
energy storage's potential. ■
-Joe Hall is partner, Kyle Wamstad is counsel, and
Dan Nugent is associate at Eversheds Sutherland.
www.powermag.com
POWER | February 2020
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POWER February 2020

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