More than two years after the Federal Energy Regulatory Commission issued Order 841, its last major legal hurdle was recently settled by the DC Circuit Court of Appeals. The Court affirmed that FERC has ultimate say over even small-scale storage on the distribution system if that storage is participating in wholesale markets. At the same time, various markets are finally implementing the changes required under the order, enabling energy storage resources (ESR) to provide services that they’re technically capable of providing.

Given the flexibility of ESRs, this means storage can participate in most of the existing energy, capacity and ancillary services markets within the ISO/RTOs.

However, despite Order 841 being heralded as the start of an energy storage revolution, projects being deployed and announced today are driven by policies completely unrelated to the order. While FERC and others are lauding the removal of some barriers to ESR participation, other FERC proceedings are erecting new ones, and many longstanding obstacles have been outright ignored. These effects combine to severely dampen the growth outlook for storage, and call into question how much credit FERC can take for the recent activity in the industry. Despite Order 841, the energy industry still doesn’t have a clear answer to when the unique benefits that storage provides to the grid will be fully valued.

Energy storage trends

Recent news about standalone storage projects has been largely limited to states with programs that encourage storage and regions with markets that recognize more of the full value of storage. We have seen projects in California, due to state-mandated resource adequacy procurements, in New York and other northeastern states, due to state storage goals, through regulated utilities that recognize the economic advantage over other resources, and in markets like the Electric Reliability Council of Texas where ancillary services markets are specifically tailored to the capabilities of battery storage.

Declining equipment and project costs, improvements in the safety and reliability of large-scale battery installations, and increased competition within the development community are all major drivers behind the recent growth of storage. There are also some specific provisions within the tax code that give ‘solar plus storage’ projects an additional boost, despite the associated operational restrictions that destroy a large share of the value that the storage portion of these facilities could otherwise be providing. Notably absent, however, are the impacts of Order 841. It doesn’t appear that FERC’s order will serve as a primary driver of storage deployments in the near term.

Towards more meaningful FERC action on storage

Order 841 served to remove obstacles for storage within its limited scope, but was not poised to be a radical push for more storage deployment. Less attention is being paid to the new barriers that have been erected elsewhere by FERC since the order. These are complex and deserving of their own detailed explanations but suffice to say that FERC has developed an obsession with absolute economic efficiency in capacity markets, hurting ESRs.

In NYISO, FERC has allowed procedures meant to limit market power of individual generators to severely limit the deployment of storage in transmission-constrained zones where new capacity is most needed, despite protests by state agencies. The minimum offer price rule (MOPR) in PJM is another example where FERC is effectively blocking state policies from providing economic incentives for storage, although MOPR is not yet affecting ESRs in states that are still finalizing their storage programs.

Clearly, Order 841 did not do as much for energy storage as is commonly understood, but FERC could pursue other policies if the commissioners are as interested in supporting storage as they claim to be. First, FERC could force ISO/RTOs to revise their ancillary services markets to reflect the capabilities of today’s technologies, instead of catering solely to large, conventional generators. ESRs built today will be severely limited in the value they provide to the grid, often only because of the technical definitions within these services.

For example, storage that could come online within seconds is selling into the existing reserve products, where generators are afforded 10 or 30 minutes to reach their full output. To properly value storage, FERC could mandate a separate 1-minute reserve product, or move to a structure where ramp rate is compensated directly and a small pool of fast-ramping reserves would support higher prices commensurate with the value of the faster response.

A longer-term effort would be to reevaluate the capacity and energy markets in the context of the evolving grid. The status quo was established based on the economics of conventional units: fixed operating costs recovered through the capacity market, and variable operating costs of fuel and maintenance covered by energy payments. With high levels of renewable penetration on the planning horizon, such as a recent study noting a 90% carbon-free grid is attainable by 2035, this market structure will become increasingly strained.

Renewables have minimal marginal costs, and ESRs have dynamic marginal costs based on degradation, risk tolerance, opportunity costs, etc. These classes are often going to be below and above, respectively, the cost-based marginal offers that set energy prices, concentrating virtually all of the market power within the few conventional resources that remain. Without reform to the existing market structures, it is hard to imagine that storage will ever be fully compensated for providing energy and capacity value.

Industry stakeholders often cite a principle that markets should strive to level the playing field, rather than pick winners and losers. With Order 841, FERC chose to maintain much of the status quo, leaving storage developers to force the square peg of storage into the round hole of existing market products. These legacy structures are destroying value that storage could provide, limiting the compensation these projects receive, and discouraging the deployment of energy storage. To have a storage policy that actually encourages deployment, FERC must realize they are effectively picking conventional resources as the winners today.

Only with more fundamental changes can wholesale markets start to recognize the full value of storage, and finally allow it to fairly compete evenly with the resources it will need to replace as part of a larger clean energy transition.