Getting Energy Storage Policies Right
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- Aug 27, 2019 4:30 am GMT
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As distributed energy resources revolutionize the way we think about the electric grid, energy storage is starting to take center stage.
Lately, efforts to promote energy storage have been ramping up across the country. A number of states, including Massachusetts, New York, and California, have adopted installation mandates. Energy storage has been labeled a key tool in some states’ plans to reach their greenhouse gas emissions reductions targets. States developing Clean Peak Standards, which aim to deliver the most renewable energy during times of peak electricity demand, are banking on the fully realized benefits energy storage.
What makes energy storage so attractive? A big part of its appeal has to do with versatility. Energy storage can be a valuable tool for every player in the grid: customers, utilities, and grid operators (My co-author Richard Revesz and I explain these values in a recent article.) At its full potential, storage will improve grid efficiency and resilience, while helping to reduce emissions. But if we don’t get the accompanying policies right, we risk falling short of these improvements.
As our article discusses in depth, imperfect market design and policy are significant obstacles to effective deployment and operation of energy storage. And, right now, policymakers have to figure out how we can efficiently integrate energy storage to strengthen the grid and meet emissions targets. Our analysis highlights three policy priorities for unlocking the full range of benefits that energy storage can provide.
First, we need to have an honest conversation about carbon emissions and the role that energy storage will play in reducing them. Energy storage has a complicated relationship with efforts to cut pollution. Even though it has the potential to boost clean energy, it has not always proven to be the environmentally beneficial technology that many expect it to be.
Batteries and other storage technology charge up with whatever generator is on the margin, ready to be dispatched next by grid operators. If that electricity is coming from pollution-intensive fossil fuels, then charging a battery is likely to increase carbon emissions—even if the generation mix in the area is clean on average. California is a cautionary example. The state, which has long boasted a forward-thinking energy resources program and has a cleaner grid than most of the country, found that its energy storage projects increased statewide greenhouse gas emissions in 2016 and 2017.
There are multiple ways policymakers can address this problem. An economically efficient solution would be to incorporate emissions into energy price signals through carbon pricing, similar to what New York Independent System Operator (NYISO) is doing. When emissions are fully reflected in energy prices and dispatch, incentives of energy storage operators are automatically aligned with the socially optimal storage charge and discharge operations.
When such carbon pricing is not an option, other policies could help. For instance, a careful cost-benefit analysis that looks at the full range of costs and benefits, including emissions, would show which projects would increase emissions and which projects would be net beneficial.
Alternatively, policymakers can align incentives by providing information on optimal times to charge batteries—and pairing that with financial incentives for reducing emissions. Organizations like WattTime have been developing real-time greenhouse gas emissions signals based on marginal emission rates. If encouraged to act upon these signals, operators will ensure that their batteries reduce emissions.
Second, we need to eliminate barriers to entry that prevent energy storage from fully participating in markets for services they have the technical ability to provide. Regardless of where on the grid they are located, energy storage systems can provide a multiplicity of services to different components of the grid. (The Rocky Mountain Institute does a great job of illustrating this on Page 19 of its report.). It is therefore important to ensure that both federal and state regulations allow these systems to participate in all relevant markets, to provide energy, capacity, or services at the distribution level.
Third, we need to eliminate barriers to earning multiple value streams. Economic theory makes clear that in order to efficiently allocate resources, prices should reflect the true value that a good or service offers to society. In other words, energy storage cannot be efficiently rolled out unless investors are able to receive reasonable compensation for all the value that storage provides. Since it can serve multiple roles at multiple levels of the grid, compensation should be provided for multiple value streams. Effectively improving the compensation framework is, of course, tricky—but it is critical. And, with some coordination between federal authorities and state regulators, it can be done.
These policy changes are necessary to harness all the benefits of energy storage. But despite some progress, we remain far from achieving these goals.
On the first policy front, more policymakers are realizing the importance of internalizing externalities—not just for energy storage, but for the electric grid as a whole. Yet although several grid operators are talking about some form of carbon pricing, realistically, we’re still a long way from accounting for the full costs of pollution in wholesale energy markets.
Several states are working on Clean Peak policies that incentivize storage owners to charge and discharge at certain times. Still, if those times do not correspond well with the marginal emission rates, the policies might have perverse outcomes. California is addressing the problem by developing greenhouse gas emissions signals that battery owners can use to charge at optimal times. But other states will need to take similar action.
On the second policy front, FERC’s Order 841 was a big step forward towards eliminating barriers to entry. In this order, FERC directed wholesale market operators to revise their tariffs so that storage resources are eligible to provide all capacity, energy, and ancillary services that the resources are technically capable of providing. Order 841 was a big improvement for leveling the playing field for energy storage by changing the inflexible rules that were designed with traditional generators in mind.
Implementation of this order has been far from perfect, however. PJM has insisted on unreasonably long duration requirements for energy storage to participate in its capacity markets. Meanwhile, NYISO is working on implementing burdensome buyer-side mitigation on even tiny energy storage systems, which are likely too small to exert market power.
Additionally, some state regulators have pushed back against Order 841 and have challenged it in federal court. A successful challenge would be a serious impediment to the participation of energy storage in wholesale markets.
On the third policy front, some state regulators are indeed improving the landscape for energy storage by trying to make sure it is compensated for the various services it provides to the grid. Value stacking is a compensation framework that gauges and combines the values of different services simultaneously, such as energy, capacity, and environmental values. But the method is complex, and there’s more work to be done on it.
The path ahead for energy storage is clearly marked: three major policy steps must be taken to leverage the power of storage. But the simplicity of this approach shouldn’t be mistaken for ease. Each step will take substantial commitment and collaboration from policymakers, regulators, and utilities.
There is no doubt that energy storage will continue to grow. But will it grow into a highly valuable resource that is integral to the clean energy transition? Only if the right policies are put in place to make that happen.