Last November, Texas utility Oncor came out with a report whose key finding sent waves through the energy community. The report, prepared by consulting firm The Brattle Group, found that up to 5 GW of energy storage could be deployed on the ERCOT electric grid — an ambitious figure, considering that analysts at GTM Research have predicted the cumulative capacity of all energy storage in the U.S. will only reach 2.5 GW by 2019.

Oncor’s plan was never to deploy all that storage itself, as some outlets reported. But its breakthrough report found that up to 5 GW, or 15 GWh, of energy storage could be made economic at the price point of $350 per kWh, roughly the cost of a commercial battery pack from Tesla, Brattle analyst and report co-author Hannes Pfeifenberger told Utility Dive.

That finding, along with a more detailed cost assessment from Brattle released in March, was expected to spur an energy storage boom in the ERCOT market, with Oncor leading the way. But since the Brattle paper was published last autumn, no big announcements of storage buys or builds on the scale the report envisioned have come out of the Lone Star State. Many observers say the structure of the Texas market — along with some of its participants — may be what’s holding the technology back.

Texas T&D's face limits on storage

When it comes to deploying storage in Texas, the problem for transmission and distribution (T&D) utilities like Oncor is that the state’s electricity market rules prevent them from using all of a battery’s functions.

When the Texas market was deregulated in the late ‘90s, lawmakers and regulators pulled apart the components of the vertically-integrated utility business model in a bid to increase competition and innovation. Whereas utilities used to control electricity all the way from production to delivery, separate entities generate, distribute, and market the electricity under today’s model.

Unfortunately for Oncor’s storage hopes, battery storage has many of the characteristics of a generation asset — meaning that they can only perform certain functions with it as a regulated T&D utility.

“We can use storage as long as it’s used only for transmission and distribution functions,” Don Clevenger, Oncor’s strategic vice president for strategic planning, told Utility Dive, “but not as generation devices.”

That means Oncor can only use batteries for functions that improve reliability or the performance of the grid, such as deploying them instead of static VAR compensators to control voltage, or using them to avoid outages. But other functions, such as smoothing out the intermittency of renewables or using batteries for demand management, are not allowed. Essentially, using batteries for any function that is traditionally the realm of Texas’ competitive power market is off-limits to the utility.

“When we talked to various policymakers in Texas, it was pretty much uniform agreement that none of the regulated wires companies would be allowed to own an asset that in any fashion participated in the competitive market,” Pfeifenberger said.

To deal with that stipulation, Oncor and Brattle proposed a workaround in their most recent white paper: Oncor (and any other Texas T&Ds) could still own and operate the batteries on the grid, but they would have to auction off capacity not used for grid reliability functions to third parties, allowing them to do with it what they wish.

“We would own the storage and put it where it makes sense to improve reliability, and then auction off the capacity to the merchant generators or whoever wanted to buy it,” Clevenger explained. “They would then use it however they wanted to use it. Whatever they paid us for that ‘warehouse space,’ so to speak, we would return to the customers.”

If considering a battery as a ‘warehouse space’ instead of a generation asset sounds like a semantic issue, that’s because it is, Clevenger told Utility Dive. But it is of great importance to the Texas grid. Even with the workaround, it is doubtful that Oncor would be allowed to own and operate the batteries without some sort of regulatory or legislative change.

“I think people agree that if a regulated utility was going to own an asset that participated at all in the competitive market, that this wouldn’t be allowed under the current legal system,” Pfeifenberger said. “So, even our proposal would be impossible under that.”

The Brattle analyst said he and Oncor representatives were part of various meetings with Texas utility regulators and stakeholders. While some, like powerful state Sen. Troy Fraser, chair of the Natural Resources and Economic Development Committee, initially expressed excitement at Oncor’s white paper, an initiative to make it easier for the utility to own storage never got fully off the ground. The legislative session ended in April with no bills filed to change market rules and no proceeding has yet been opened at the PUC to allow T&D utilities to realize the full range of storage benefits.

What’s really stopping storage in Texas?

While the Texas market structure was supposed to enhance innovation and competition, it has somewhat ironically ended up stifling it when it comes to grid storage, according to former Texas utility commissioner Karl Rabago, who is now head of the Pace Energy and Climate Center.

When the law that deregulated Texas electricity markets was passed in 2002, “we said [T&D utilities] couldn’t own generation, because we didn’t want them to use market control to cut out the opportunity for DERs,” Rabago said. “At the same time, generators don’t want [T&D’s] in the generation business, and a battery is like that.”

There are other factors holding storage back, Rabago pointed out. The ERCOT market, which covers most of Texas, lacks any direct mechanism for valuing capacity — a key benefit that batteries offer. Not only that, but revenues for T&D companies and generators are not decoupled from electricity sales — they are compensated according to how much energy they sell. From the standpoint of the generators, “you’re really doing damage to the system if you reduce the sales,” Rabago said.

Some of those market rules may help explain why Pfeifenberger found generators and large industrial companies in Texas opposed to Oncor’s storage plans.

“The competitive market participants, especially the generators, they really dislike the storage idea because they feel this is more competition,” Pfeifenberger said. “The large industrials didn't like because it’s not benefitting large industrial customers, so the combination of large industrials and generators in Texas kind of torpedoed the hope of legislative changes.”

The trade groups for the industries Pfeifenberger named were far more coy in their assessments of Oncor’s plans.

The Texas Competitive Power Advocates (TCPA), a trade group that represents more than half the generating capacity in the state, said it could not fully comment because Oncor has not made a formal plan public beyond the two Brattle reports.

Even so, TCPA executive director Lindsey Hughes wrote to Utility Dive that the group’s members could be open to storage as long as it doesn’t change the existing regulatory compact.

“Our members are interested in learning more about Oncor's proposal and how it purports to properly integrate storage technology in compliance with our successful competitive wholesale market design and without placing costs and risks on ratepayers or disrupting the cost effective, reliable electric service that Texans have come to expect in our state,” Hughes wrote in an email.

The Texas Association of Manufacturers (TAM) was more direct in their response. While making it clear the trade group had not evaluated any legislation about the Oncor plan, TAM president Tony Bennett said that, “generally speaking, TAM maintains its long-held principle that public policy that drives up electricity costs without improving reliability is flawed public policy.”

“Our Association does not support blurring the line between the competitive electric market and regulated utility services or providing preferential treatment or subsidies to certain technologies,” he said.

Capturing the real value of storage

Why Oncor’s proposal turned up dead in the water before any legislation was filed or a PUC docket was opened is the subject of a separate investigation. But the bottom line is clear: Leaving the rules the way they are will significantly diminish the value proposition of energy storage for Texas utilities.

The estimate of 5 GW of storage being economic on the grid is contingent on stakeholders capturing all of the value streams that a battery has to offer, Clevenger said, including the functions that are off-limits to utilities like Oncor under Texas rules.

“The point of the Brattle report was that you're gonna be able to do more batteries if you can provide all those benefits to your customers,” Clevenger said.

Pfeifenberger concurred. “If you can't capture all of those value streams, large scale deployment still wouldn’t be cost effective even at the [$350/kWh] price point,” he said. “You still might deploy it in certain cases for frequency regulation services or something like that, but the level of deployment for these ‘one trick pony’ applications would be much much smaller.”

Envisioning a path forward for storage deployment in Texas without some form of market change is difficult, both Pfeifenberger and Rabago said. According to the logic of the market, independent third party vendors should be the ones to construct assets that participate in the state’s competitive electricity markets.

The problem is that storage isn’t much like other assets on the grid. Most of its value — especially for the reliability functions — comes from its locational placement on the grid, and T&D utilities are currently the only entities that have the data on where storage could best serve the grid.

To capture all the value that storage has to offer, Rabago said, “you need to be able to identify the places where you have the highest sub-nodal marginal distribution capacity costs,” a measure of how expensive reliability interruptions are at a specific grid location over time.

Theoretically, a third party vendor could go to Oncor and ask for the data on where the most expensive nodes are on the grid so they can be targeted. “If you’re Oncor, you already know that, or you have the ability to find out pretty easily,” Rabago said. But that brings up the issue of sharing data with third parties, which utilities aren’t exactly always eager to do.

“You could have ‘Storage Inc.’ knock on Oncor’s door and ask, ‘Where are your heavily loaded feeders?’” Rabago said. “And Oncor’s going to say, ‘Who the hell are you?’”

There are technical issues with third parties deploying storage as well, Pfeifenberger said.

“If you have a battery that has to be integrated into the switching system, it’s very difficult for the T&D company to work with a third party [and] to have third party equipment in their substation,” he said.

Both agreed it makes more sense to let the T&D utility lead the charge on storage.

“I think it’s only logical that Oncor has the best visibility and therefore a certain cost advantage in launching this technology,” Rabago said.

“If you want to deploy storage in that way, I think the distribution company is in the best position to own and operate that battery and auction off the capacity,” Pfeifenberger said. While there may be different ways of going about it, the reality is that there is “a big value proposition in integrating batteries into the distribution system.”

“If it doesn’t happen in Texas, maybe it will happen somewhere else with vertically-integrated utilities that don’t face the separation between competitive and regulated assets,” he said.

Oncor’s path forward

For now, Oncor is worrying more about actually deploying storage and using it to improve reliability than it is about changing market structures, according to Clevenger.

“Where our focus now is at is batteries are operationally ready and now we’re trying to find the places where they’re economically best today,” Clevenger said. “The next legislative session is a ways off, but right now we’re working with our operations team to figure out where we can put them today to improve the system.”

When Utility Dive first spoke to Clevenger back in June, he said that Oncor already has five “little bitty 25 kW batteries” on its system. While some had not been on the system more than 6 months at the time, they already had saved more than 900 minutes of outages for customers.

“You start talking about multiplying that across the system and you see how much you can save,” he said.

Oncor’s end game is to get storage as close to the home or business as possible, according to Clevenger.

“We would love to put [a battery] on the side of every home and business but that’s a ways off,” he said. “One of my long-term visions is that hopefully we find someone who will build us a transformer and a battery all in one … Then you start talking about people not ever losing power but in those three-day ice storms.”

Research and deployment of storage for those reliability functions can still go forward without market changes, but it won’t allow the utility or the Texas market to fully capture all the value that storage has to offer. Accomplishing that is still a work in progress, Clevenger said, and the utility is open to new ideas on how to design a storage program that satisfies market stipulations.

“Whether we own the batteries or someone else owns the batteries, the goal is to get all those benefits to customers in the most cost effective manner,” Clevenger said. “It’s yet to be determined what exactly might need to change in order to make that happen.”

“The Brattle mechanism is really the only one that we’ve found that keeps us out of the generation business and captures all the benefits of storage,” he continued. “We’re wide open for any other mechanism that can do that and get the most storage deployed.”

Clevenger was hopeful that the tide may soon turn in favor of storage in the Lone Star State.

“The responses [to the Brattle reports] were really encouraging and I think the discussion we started a year ago has ramped up the discussion on batteries,” he said. “The real issue that Texas suffers from is low energy prices. If we had the energy prices of California or the Northeast, with our deregulated market, I think you would see a much bigger proliferation of batteries."