FERC vs. EPSA Ruling: A Win for Demand Response and Energy Storage

By Ian McClenny, Fall 2015 Fellow When independent system operators (ISOs) and regional transmission organizations (RTOs) were structured over a decade ago, rate structures were based on participation by conventional energy generation methods. At that time, new technologies and services like energy storage were not contemplated. The Federal Energy Regulatory Commission (FERC) Order 745, approved in 2012, called for grid operators to pay the full market price (known as the locational marginal price) to economic demand reduction resources in the real-time and day-ahead markets, so long that it is cost effective. In short, Order 745 allows third parties (i.e. customers) to circumvent utility prices and provide flexibility via demand-side-management. The United States Supreme Court (SCOTUS) made headlines on Monday, January 25, 2016 by upholding FERC’s authority to regulate demand response (DR) programs in wholesale markets. Known as FERC vs. Electric Power Supply Association (EPSA), the Court reaffirmed in a 6-2 decision that FERC acted within its authority under the Federal Power Act when it issued Order 745, setting standards for DR measures and pricing in wholesale markets. This ruling is a big win for demand reduction service providers like EnerNOC, whose stock shares jumped 65% midday after the ruling.

The decision is not only big for DR, but has huge implications for resources at the edge of the grid like energy storage. Battery storage is gaining popularity among commercial and industrial[PM1] [IEM2] sectors as a cost-effective solution to reduce peaks, manage demand charges, and integrate renewables; Navigant Research forecasts that 328.7 GWh of new distributed battery storage will be deployed from 2016-2025[PM3] [IEM4] . As the new ruling could catalyze a sharp growth in the distributed storage industry, utilities and their customers have a unique opportunity to leverage it in a variety of ways to provide value on both sides of the spectrum.

Battery storage offers enriched DR options in a number of ways, one being the speed in which storage can be deployed. With storage, utilities are able to instantaneously declare DR events (rather than hours or a day ahead). Additionally, with advanced battery management systems, atypical events that occur on the grid can be responded to autonomously. Distributed storage as a resource is dependable in performance, and flexible in location. Batteries have a finite amount of energy they can provide, allowing grid operators to schedule other energy resources with increased certainty. Conventional DR is prone to under- or over-estimating customer behavior which leads to decreased system efficiency.

Demand response and energy storage have significant implications when compounded with increasing penetration of variable generation (VG). A study conducted by the National Renewable Energy Lab found that the grid can accommodate approximately 30% of annual electricity demand from VG with “flexibility options” (namely changes in operational practices) that increase the penetration of renewable energy resources. As renewable penetration exceeds the 30% threshold, integration becomes increasingly difficult because conventional generators cannot readily moderate output, causing assets like wind and solar to be curtailed which could raise the system costs. Even with increased curtailment of conventional generation, renewables offset less fossil fuel generation, effectively decreasing its overall value. This creates a huge market opportunity for DR and energy storage with their ability to shift load patterns, solidify capacity, and increase grid flexibility.

SCOTUS made a monumental ruling for the cleantech industry, and there will be increased DR participation to come as a result. The market has already seen several DR/Storage systems like Schneider Electric and Johnson Controls (both leaders in DR), and even partnerships like that ofEnerNOC and Tesla. The nexus of energy storage and DR provides efficient, economical solutions for utilities and their customers in the commercial and residential sector. As a result, how energy is produced and consumed will drastically change, requiring rate-makers to be more versatile with evolving regulatory needs.