Federal energy regulators recently embraced utility-grade, battery-facilitated energy storage, and now states must fall in line to unlock the full value of storage technology. Stakeholders across a wide cross section of industries – investor-owned utilities and cooperatives, solar and wind developers, prospective consumers such as commercial real estate groups, warehousing companies, or other entities that might someday want to own or invest in renewable power – would do well to stay abreast of these rapidly developing markets. If the Federal Energy Regulatory Commission (FERC) and states align, the advent of storage technology could usher in the next phase of renewable energy – one where renewable systems are both reliable and self-sufficient.
As its name implies, energy storage – in the form of utility-grade batteries that mesh most naturally with solar power and, to a lesser extent, wind – means storing excess energy generated during hours of abundance. The energy is stored until the owner needs it, or until it would be more valuable to the grid, such as when the sun goes down or the wind calms. Aside from the potential economic benefits – which depend greatly on the shifting regulatory environment – other benefits of storage include the ability to establish a microgrid capable of providing comprehensive renewable power as an amenity to residential and commercial tenants or to keep vital infrastructure and emergency service providers running during grid outages. The reality of reliable renewable energy is one step closer, as recent regulatory and legislative developments have exhibited increasing momentum toward this goal, but there remains much more work to be done.
In a watershed moment for the industry, the FERC issued an order in March that sets the stage to remove barriers from wholesale markets and, in doing so, welcomed the key attributes of energy storage systems. More recently, some states have taken similar steps, with others likely to follow. With grid resiliency and efficiency at the forefront of its decision, the FERC recognized that energy storage systems are subject to market barriers, which must be removed to level the playing field for storage systems in competitive wholesale markets. The FERC order, however, addresses but one side of the coin, and the fate of energy storage will turn in equal part on how states clear the way for this emerging technology and maximize the revenue available to storage systems. It is therefore important for stakeholders to first target storage-friendly states such as those discussed in this article, where the greatest returns on investment may lie.
For a stark example of how important state action is, a recent study by the Brattle Group has estimated that FERC’s Order 841 will open the door to 50 gigawatts of storage capacity – a staggering amount – over the next decade. But this estimate relies on one major assumption: that energy storage captures all available revenue streams, not just those presented by wholesale markets, which will account for only about half of this additional capacity. To obtain the remaining and otherwise stranded value streams presented in transmission, distribution and customer service, states must address these market barriers as well.
Several states have assumed leadership roles in integrating storage, and some have enacted programs to incentivize storage development. California leads the way with a mandate of 1.325 gigawatts of storage by 2020. A number of other states, such as Massachusetts, New York, Oregon, Arizona and Nevada, have set target goals. Maryland has instituted its own version of a storage investment tax credit for residential and commercial systems, but with a modest $750,000 cap in credits.
In April, New Jersey passed legislation that formalizes Governor Phil Murphy’s stated goal of achieving 600 megawatts of energy storage by 2021, and then increasing to 2 gigawatts by 2030. Though New Jersey has attempted to provide limited grants to storage installations in the past, these efforts were thwarted by barriers imposed by PJM, the regional transmission organization that coordinates the wholesale electricity market in New Jersey and other nearby states, which denied them the revenue needed to make the projects economically feasible. Regardless, this mandate will require a much stronger commitment to energy storage technology, and with the recent FERC order, changes to PJM’s rules are nearly certain.
To attain these thresholds, the legislation requires that the New Jersey Board of Public Utilities, in conjunction with other stakeholders, investigate the best ways to implement storage technologies within the state. Notably, the report must include recommendations for financial incentives, signaling that tax credits, grants or other forms of subsidies may be available in the future. Six months after this report has concluded, the board is required to establish procedures to achieve the mandates established for 2021 and 2030.
But mandates go only so far, and these efforts do not address many of the challenges facing storage technology at the state level, often due to frameworks that did not contemplate the advent of modern storage systems. For instance, resource planning programs, in which utilities plan their resource needs far in advance, do not yet capture the full value of storage. Similarly, storage is typically ignored or only considered marginally in planning transmission and distribution. Because distribution systems are, for the most part, subject primarily to state jurisdiction, actions at the state level will be vital to realizing the benefits that storage may offer in the form of investment deferrals and other benefits of distribution-level services.
Moreover, one of the greatest strengths of storage systems – diverse functionality – is its Achilles’ heel in a traditional regulatory framework. The very flexibility that storage systems provide – specifically their triple-threat capabilities as a generation source, power sink and frequency regulator – can place them at a disadvantage in traditional classifications of electric utility asset categories. For instance, when a storage system’s services are stacked to take advantage of multiple value streams, there is no clear hierarchy of dispatch priority for that system. This issue is further evident in deregulated markets, where generation service has been unbundled from transmission and distribution service, as it may not be clear who is permitted to own such systems or for what purposes. These are just a few examples of the uncertainty confronting multifaceted storage systems, and resolving these issues will require new or revised regulations to address the unique nature of storage, such as amended definitions, rule exceptions or carve-outs.
The continuing decline of net metering programs could provide one area of opportunity for storage systems. Several states have capped net metering programs to newcomers, altered the rates at which utilities purchase excess energy, or are looking to abolish the programs altogether. Hawaii has replaced its net metering program with a new program that deploys time-of-use rate mechanisms, largely as a result of its abundance of solar generation that has created a load-supply imbalance. Such a program is tailored specifically to encourage storage installations to complement existing solar resources. Should other states adopt similar time-based rate mechanisms in lieu of net metering programs, storage systems stand to benefit from this shift in incentives.
These challenges are surmountable, but they require significant effort by legislative and executive bodies. Inevitably, there are regulations and laws that will have to be amended, supplemented, or at least clarified, to provide reasonable assurance to investors and developers that storage projects are viable and ultimately profitable. Nevertheless, the trajectory for utility-scale storage integration points skyward – FERC Order 841 appears to acknowledge as much. But it is equally true that state action will be a significant variable as to how steep the installation curve will slope. Monitoring and trying to influence these state-level developments will be crucial to stakeholders who seek to capitalize on this market.
Nathan Howe advises companies on renewable energy procurement and project development matters and counsels energy clients on regulatory schemes, jurisdictional issues and related financial considerations. An attorney with McCarter & English, LLP, he keeps abreast of policy developments in the energy storage sector and actively participates in renewable energy industry events.
Allen O’Neil helps renewable energy companies, cooperative and municipal utilities, and other businesses address their energy regulatory and transactional matters. A partner with McCarter & English, LLP, he has assisted these clients in securing financing for large renewable and electric energy projects and facility acquisitions and has negotiated power supply arrangements.
Published April 27, 2018.