IEEE Power & Energy Magazine - September/October 2017 - 49

adequate market signals. System operators, in their role as
neutral market enablers, should be allowed to adapt market
structures as they see fit for an efficient deployment of new
flexible resources and should also be granted greater flexibility when contracting network services.
Finally, a market signal to incentivize the participation of
highly flexible resources in these very short-term markets is
still missing. By focusing strictly on capacity, most reserve
markets still fail to remunerate the contribution of flexibility.
Nevertheless, some efforts have been undertaken at both the
U.S. federal and state levels to implement the participation of
fast resources in providing ancillary services.
Several FERC orders issued over the past few years have
facilitated the participation of ESSs in frequency regulation markets. First, FERC Order 890 in 2007 allowed NGRs
(which include ESSs) to provide both cost-based and marketbased ancillary services.
Potentially, the most important piece of regulation in
the United States supporting the participation of new flexible resources in these services is FERC Order 755, which
implemented the "pay-for-performance" concept for
frequency regulation. The pay-for-performance compensation mechanism requires regional transmission organizations and ISOs to take into account the speed and accuracy
of frequency regulation services. A distinction must be
made between the capacity payment (which includes the
marginal unit's opportunity costs) and the payment for
performance (which reflects the accuracy and speed of responding to the requested level of capacity). Figure 3 points
out those U.S. power systems that have already implemented FERC Order 755.

Tariff Design
Tariffs affect ESSs in myriad ways. Here, we highlight the
interaction between ESSs and grid tariffs, retail tariff design,
and renewable energy system (RES) support mechanisms.

from final consumers' grid fees. This idea has recently been
supported by FERC, which proposes that energy storage
devices that buy energy for subsequent resale should do so at
the locational marginal price.
To our knowledge, the European Commission's Winter Package does not provide specific guidelines concerning the responsibilities of ESSs with respect to grid fees. The -commission
merely states that grid fees should be applied in a way that does
not discriminate against ESSs or between production at transmission and -distribution.
We argue that the discussion should focus first and foremost
on designing efficient mechanisms for allocating grid fees that
are driven by the fundamental cost-causality tenet of microeconomics. Grid tariffs should depend only on each agent's
production and consumption profile not on arbitrary classifications such as end-user classes. Incentivizing ESSs (or any other
technology) deployment by artificially reducing grid fees will
only shift those costs to other agents in the system, driving inefficiencies. In the near term, we support the notion that ESSs
should not be exempt from grid charges due to the inefficiencies
this could create; but, in the long term, we must reexamine our
allocation of grid fees.

Retail Tariff Design
For ESSs operating in distribution networks-especially those
operating "behind the meter"-retail tariffs are a key driver
of economic viability. A full review of the economics of retail
tariff design is beyond the scope of this article. However, we
highlight the impacts of two key retail design choices: 1) the
temporal and geographic granularity of tariffs and 2) the structure of grid tariffs.
Despite the wide-scale rollout of smart meters in the
United States and Europe over recent years, time-varying
retail tariffs remain few and far between. In the United
States, fewer than 10% of all residential and commercial
customers with smart meters pay a time-varying electricity

Grid Tariffs
The method for allocating network
and other regulated costs (referred
to simply as grid fees) to generation and demand varies depending on the power system. Most
-systems choose to allocate grid
fees to final consumers; however,
in some systems generators also
pay grid fees.
The particular nature of ESSs-
which act both as generators and
consumers-has pushed some
stakeholders to argue that ESSs
should be treated as time-shifted
generation when it comes to grid
fees; in essence, these ESS owners
argue that they should be exempted
september/october 2017	

ISO-NE
January 2014
NYISO
October 2012

CAISO
May 2013

PJM
October 2012

ERCOT
Not Subject to FERC,
But Created
Fast Regulation
Service

SPP
March 2015

figure 3. The status of FERC Order 755 across the United States. ERCOT: Electric
Reliability Council of Texas. (Source: FERC).
ieee power & energy magazine 	

49



Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - September/October 2017

IEEE Power & Energy Magazine - September/October 2017 - Cover1
IEEE Power & Energy Magazine - September/October 2017 - Cover2
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IEEE Power & Energy Magazine - September/October 2017 - Cover3
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