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FERC Clarifies Cost Recovery Flexibility for Electric Storage Resources

As part of an ongoing effort to address issues raised by, and encourage the entry of, distributed energy resources, the Federal Energy Regulatory Commission (FERC) last week issued a Policy Statement clarifying the flexibility electric storage resources have regarding rate designs to recover their costs. FERC earlier proposed rules to remove barriers to the participation of storage and other distributed resources in the organized wholesale electricity markets administered by Regional Transmission Organizations (RTOs).  These policies and rules are of interest to storage operators and investors, grid managers, other participants in RTO markets and consumers of storage services.

Storage resources, such as large-scale batteries and flywheels, are able to both absorb and discharge electricity. These resources can provide multiple services almost instantaneously and thus may fit into more than one of the traditional asset functions of generation, transmission, and distribution. The Policy Statement provides guidance for storage resources that want to charge rates for providing multiple types of services.FERC has rate jurisdiction over wholesale sales and transmission of electricity in interstate commerce, and has fundamentally different rate policies for those two types of services. Wholesale sales are made from generation facilities and are generally provided competitively, especially in RTO markets.  Accordingly, FERC allows prices to be determined by market forces.  In contrast, transmission grid services are traditionally provided by wires facilities and are generally regarded as not capable of being provided competitively.  In exchange for agreeing to provide transmission service, cost recovery is assured but, to protect customers from excessive rates, providers are restricted to rates that recover only their costs.

Storage resources can provide both types of services and can switch from one to the other almost instantaneously. They can provide generation capacity and energy services, for which they may make offers into the RTO competitive auction markets, and they can also provide transmission-type grid support services, such as voltage support or thermal overload protection, for which they receive cost-based rate compensation.

In November 2016, FERC held a technical conference to examine compensation for storage resources used for multiple purposes. According to the Policy Statement, most participants and commenters support multiple uses and market-based and cost-based revenue streams for storage resources, noting it would be inefficient to let them sit idle when not providing grid service.  However, concerns were raised about allowing an electric storage resource to recover its costs through both cost-based and market-based rates concurrently.  The Policy Statement provides guidance as to how these concerns could be addressed.

Double recovery of costs.  This concern arises from a provider earning profits from market sales from storage resources, the costs of which are borne by cost-based ratepayers. In such circumstances, captive customers could be subsidizing public utility shareholders.  The Policy Statement says that proposals for electric storage resources to use cost-based rates paid by captive customers should address the potential for the recovery of those same costs through market-based sales. The statement clarifies that crediting market revenues back to the cost-based ratepayers is one possible solution, but there may be other ways to address the issue.

Adverse impacts on markets.  The concern here is that electric storage resources would bid to supply  market services in a way that suppresses market clearing prices. Because they recover  costs through cost-based rates, storage resources could offer at lower prices.  FERC does not share this concern and is not convinced other market competitors would be adversely impacted.  The Policy Statement notes that many assets that participate in RTO markets also receive some form of cost-based rate recovery.  For example, some utilities make cost-based sales to captive wholesale customers and off-system market-based sales to others.  In these circumstances, FERC requires crediting market revenues to the cost-based customers but has not required anything more to address concerns that dual revenue streams undermine competition. Accordingly, the Policy Statement says that the market impact concern also could be addressed  through revenue crediting.

RTO independence.  A fundamental requirement of an RTO operator is to remain independent of market interests.  However, coordination is needed between the RTO and an electric storage resource that offers both transmission and market services.  For example, the storage resource should be maintained so that the necessary electrical charge can be achieved when needed to provide a cost-based service.  The Policy Statement notes that if this need is reasonably predictable as to size and the time it will arise each day, the storage resource should be permitted to deviate from the needed  charge level at other times of the day in order to provide market-based rate services.  But if the need for the cost-based service is not reasonably predictable, the cost-based rate service may be the only service that the electric storage resource may provide.

The Policy Statement offers additional guidance on the independence issue:

  • When the need arises for a cost-based service, the dispatch of the storage resource to address that need should receive priority over the resource’s provision of market-based services. Performance penalties could be imposed on the electric storage resource for failure to perform at these times.

  • The provision of market-based services should be under the control of the storage resource rather than the RTO. When the storage resource is not needed for the cost-based service, the RTO would rely on offers from the storage resource for such operation.

Commissioner LaFleur dissented from the Policy Statement, arguing that it summarily dismisses concerns regarding the impact of multiple payment streams on market competition and, in any event, should have been included in the related proceeding that proposed rules to remove barriers to storage participation.

The Policy Statement will be effective upon publication in the Federal Register.

© 2022 Covington & Burling LLPNational Law Review, Volume VII, Number 25
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About this Author

Wilbur C. Earley, Energy attorney, Covington Burling
Energy Policy Advisor

Drawing on has over 39 years of experience in the energy industry, Bud Earley, a non-lawyer senior advisor, provides analysis and advice on a wide range of federal and state energy regulatory issues, including transaction and rate issues, regional transmission organization (RTO) tariffs and rules, interconnection, retail choice and demand response for electricity customers, a natural gas pipelines and hydroelectric facility licenses, and LNG export authorizations.

202-662-5434
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