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At its July meeting, the Federal Energy Regulatory Commission ("FERC") issued final rule that lays the regulatory groundwork for energy storage, as well as improving the markets for many ancillary services. The final rule should provide much-needed regulatory clarity that will encourage deployment of many rapidly-advancing energy storage technologies.
The final rule addresses two major issues: regulatory requirements for selling ancillary services in interstate electricity markets and accounting requirements for energy storage. With respect to the sale of ancillary services, the rule modifies requirements for sellers of ancillary services to demonstrate that they lack market power in order to sell at market-based rates (often referred to as the "Avista policy"). The Avista policy has long been criticized because it is difficult or impossible to develop the data necessary to demonstrate a lack of market power for many ancillary service markets. For this reason, in the final rule, FERC concluded that the policy has become an "unreasonable barrier to entry" into ancillary services markets.
Hence, FERC concluded, it should allow sellers that have obtained market-based rate authority for sales of energy and capacity to also sell imbalance services and operating reserves at market-based rates. However, with respect to certain ancillary services -- Reactive Supply and Voltage Control, as well as Regulation and Frequency Response -- the Commission determined that it lacked sufficient evidence to be assured that these services can be sold at market-based rates without risking market power abuse. Accordingly, the new rule allows these services to be sold if there are added assurances of protection against market power abuse: those services can be sold either at rates that do not exceed the approved tariff rate of the transmission provider to which they are sold; or, through a competitive solicitation carried out by the purchaser.
These changes should increase the options for third parties to supply ancillary services and increase market competition for these services. In addition, FERC's changes should improve the ability of system operators to integrate variable renewable resources such as wind and solar since the variable output of these resources places special demands on ancillary services to maintain reliable operation of the electric transmission system. Finally, operators of energy storage devices and other kinds of equipment such as HVDC transmission converter stations, which can supply one or more species of ancillary services, should benefit by improved access to markets for these services.
In the second set of changes adopted by FERC, the Commission made a number of changes to its Uniform System of Accounts and to various reporting requirements to better track the costs and revenues associated with energy storage. At base, the existing Accounts system generally tracks assets either as transmission or as generation, but energy storage devices often do not fit neatly into either category. The final rule adds several new storage-related items to the Uniform System of Accounts and also makes changes to standard reporting forms to better reflect the nature of energy storage. Ultimately, because the Uniform System of Accounts is the starting point for defining the rate base for regulated utilities, the accounting changes should allow energy storage costs to be more accurately tracked and the return on storage-related investments to be better identified.
If you have any questions about the new final rule, energy storage, FERC regulation, or other matters involving the energy industry, please contact a member of GTH's Energy, Telecommunications, and Utilities practice group. We have decades of experience with FERC matters, energy industry accounting, taxation and financing issues, and complex regulatory issues.