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FERC's power storage final rule likely to affect peakers, scarcity pricing

Houston — The US Federal Energy Regulatory Commission's new final rule mandatingthe integration of electric storage into wholesale power markets islikely to affect the viability of peaking resources and mitigate powerprice spikes during scarcity events, observers said Friday.

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On Thursday, FERC approved a final rule to require each independentsystem operator to alter its tariff to create market participation rulesrecognizing and accommodating the physical and operationalcharacteristics of storage so it can participate in wholesale powermarkets. ISOs have up to 270 days after the rule's publication in theFederal Register to file necessary tariff changes and 365 days thereafterto implement the changes.

"It could change the game for peaker plants, which supply less than 1% ofour total energy consumption," said Joshua Rhodes, University of TexasEnergy Institute research associate, in an email Friday.

When a generation resource matched with storage can compete with naturalgas-fired combined-cycle plants with about 60% capacity factors, "that iswhen I think the scales will tip" for power markets as a whole, Rhodessaid.

Asked how the implementation of the rule might affect wholesale powerprices, Rhodes said, "Average wholesale prices, not too much, butpeak/scarcity prices could be subdued."

Neil McAndrews, an energy market consultant based in Austin, Texas, alsosaid he expects the rule change to "affect the viability of peakingresources the most."

"This is likely to lower peak price distributions so that they are muchmore uniform," McAndrews said in an email Friday. "Round-the-clock pricesand peak prices might be the same thing."

Although FERC officials on Thursday touted energy storage's potentialbeneficial effects on bulk power system resiliency, no observers whoresponded Friday foresaw Thursday's ruling as affecting FERC's resiliencyproceeding initiated in January in response to the US Department ofEnergy's notice of proposed rulemaking seeking to compensate baseloadgeneration such as coal and nuclear plants for maintaining three months'fuel supply on-site.

For example, Matthew Cordaro, a former Midcontinent Independent SystemOperator CEO who now resides in New York, said the electric storage finalrule would "probably not" affect FERC's resiliency effort, "given thenascent stages of storage technology." EFFECT LIKELY 'MUTED' FOR AT LEAST FIVE YEARS

Eric Smith, Tulane Energy Institute associate director, said, "While weapplaud FERC for getting out in front of the issue, the vanishingly smallshare of battery power means the effect will be muted for at least thenext five years."

Ultimately, batteries will "most likely" be combined with intermittentresources "allowing for the sale of dispatched power," Smith said in anemail Friday.

"In that role the new batteries will be competing with existing entriesincluding combustion turbines and pumped storage," Smith said. "Again,the impact will be muted at best."

Timothy Fox, vice president and research analyst at ClearView EnergyPartners, an energy market consultancy, said FERC's storage final rule is"reactive to trends already underway in the states and the wholesalemarket," but the rule remains constrained by federal regulators'authority over wholesale power markets, while state agencies regulateretail electricity.

FERC initiated the storage rulemaking in November 2016, and Fox said thefinal rule "is consistent with the direction [regional transmissionorganizations] and ISOs are pursuing," except FERC set the minimum sizeof a battery capable of participating in the market at 100 kW, while mostISOs have set larger minimums.

"We read the final order [as leaving] considerable room for variationamong the regions to reflect local portfolios," Fox said in an emailFriday.

The Electric Reliability Council of Texas, which has limited DC tieconnections to the rest of the North American bulk power system, is underthe Public Utility Commission of Texas' sole jurisdiction, and the PUC onThursday issued an order denying American Electric Power's applicationfor declarations related to lithium-ion battery facilities proposed forinstallation at Woodson and Paint Rock, which are both in relativelysparsely populated areas of west-central Texas.

The PUC denied the application without prejudice "because any suchdeclaration could limit unnecessarily the future use of energy-storagedevices in the Electric Reliability Council of Texas" (Project No.46368).

Instead, the PUC initiated a rulemaking project "to establish aregulatory framework that will allow for the efficient and appropriateuse of energy-storage devices as well as other technologies within thelimits of" Texas' utlility regulatory law. ERCOT STORAGE ISSUES 'ALL VERY DIFFERENT'

Robert King, CEO of the South-central Partnership for Energy Efficiencyas a Resource, a nonprofit that advocates for energy-efficient products,technologies and services in Oklahoma and Texas, noted that in ERCOT,electricity generation, transmission and delivery are unbundled, whichwas the main issue in the AEP project.

"Because a utility is actually, literally prohibited from generating,buying, selling or taking possession of electric power in any way, it isunclear how it would operate a battery," King said in an email Friday."AEP tried to see if the commission would allow it to own storage for acouple of exceptional cases where the savings were way more than enoughto make it cost justified. But the chair, recognizing that there are manymore issues buried here, chose to initiate a rule making to look at thebroader issue of the relationship of the wires utility ... to theexpanding potential of [distributed energy resources]."

In 2017, SPEER issued a report on how the state might resolve the issue,in particular allowing a utility "to treat an expense for storage (orDER) as a service, as an investment and allowing a return on ...investment," King said.

The PUC project's issues are "all very different than the issues beingraised by the FERC rule," King said.

"For example, ISOs have legacy resource participation requirements like aminimum of 5 MW for a storage resource (MISO) or require 24 hourcapability (PJM and [ISO New England]) to participate in the day-aheadmarket," King said. "Storage in particular needs rules that allow astorage project owner/operator to appropriately manage the resource toassure its longevity and performance, for example, and not result inover-cycling the unit." -- Mark Watson, markham.watson@spglobal.com

-- Edited by Gail Roberts, newsdesk@spglobal.com